Is a Fixed-Rate Mortgage a Good Idea?
A fixed-rate mortgage is one that allows you to fix the interest rate of your mortgage for a set period of time – usually between three and five years. This has several benefits, particularly for first time buyers who may not want to take any risks initially and who want to know exactly what they pay each month. In this article we assess the various types of mortgages available.
The predictability of fixed-rate mortgages is the big appeal for first-time buyers. It means that they can better plan their financial future in the early days. It also means they don’t lose out in the housing market changes and interest rates suddenly drop. The drawback is that they also don’t benefit when interest rates rise.
Is a Variable Rate Mortgage a Good Idea?
A variable rate mortgage refers to a flexible mortgage arrangement that allows you to benefit from changes in the interest rate. While this may mean you sometimes lose out when the interest rate falls it also means you may be able to pay your mortgage off sooner if there is a net gain for your over the period of the variable rate.
A further benefit of variable-rate mortgages is that they allow you to pay more money into the arrangement to bring down the principal amount. A fixed-rate mortgage does not allow this option. For first time buyers who don’t know the ropes, a fixed-rate mortgage is a better idea, but it’s worth considering a variable rate at some point in your mortgage cycle.
What is a Split Loan?
If these two options seem too binary for you there’s a third – that is the split loan mortgage. A split loan mortgage is an arrangement in which you place some of the principal loan into a fixed-rate mortgage and the rest into a variable rate. The idea is that the fixed rate will give you security, while the variable-rate gives you options.
The mortgage is split into two, and the rules apply to the separate halves. You will not be able to contribute extra payments to the fixed half but you will to the variable half. At the end of the fixed term, three or five years, you will have the option of switching to a variable mortgage or staying with the same setup.
How to Choose Between Fixed and Variable?
Your choice will depend on your financial circumstances and your personality. Other mortgage types also exist, such as a Contractor Mortgage, but in general, a fixed rate is good for first-time buyers as it lets them learn about mortgages and plan for the future. If however you are already savvy and know the housing market, then a variable rate could be an option, but at first, a fixed or split mortgage is best for new buyers. If you are unsure about your options or if you have further questions, a mortgage broker is a good idea – they are expert and can offer the best insights into your individual circumstances.