Fixed Rate or Variable Rate: Which one to Choose?
Better a fixed-rate or an adjustable-rate mortgage? This is the classic question that arises when buying a house and you have to apply for a mortgage to the bank.
Today the difference is more than 2 percentage points in favour of variable rates. For a £150 thousand loan to pay off in 20 years and a 3% spread, the monthly payment of a fixed rate mortgage would be £ 1,030 against the £ 850,00 instalment of a variable rate mortgage. This means a difference of £180,00. Apparently the dilemma would already be solved. But the current Euribor (the benchmark rate), at historic lows at the moment, can only go up over the years, although the forecast for the next period are quite encouraging. According to experts, the 3-month Euribor may further increase to 2 % between 2017 and 2018 and this would mean that the difference between the fixed and variable rates would disappear. Not to mention that the Euribor will then rise further, while the choice of a fixed rate would blocked the instalment.
Choosing Between Fixed Rate and Variable Rate
The choice between an adjustable rate mortgage or fixed rate depends on many factors, including:
your love for risk
your saving capacity.
We can estimate that a fixed rate mortgage is ideal if the amount of the loan is not very high. In this event it is maybe better to prefer to opt for tranquillity, especially if you have no expectations of salary increase or are retired.
Variable rate mortgage could be perfect if your current earnings are expected to increase in working life, for example, thanks to a career on the rise. Or if the amount of the loan is very high. In this case, the savings during the first years would be considerable if compared to a fixed rate.
Variable Rate Mortgage
By opting for a variable rate, in the event that interest rates rise you can always choose to remortgage, or to transfer your debt to another bank, therefore to choose a better rate suitable to your needs or lengthening the repayment duration.
In fact, it is important to remember that the choice of a mortgage, whether at a fixed rate or variable rate, is no longer a drastic decision as it was many years ago. Today, there are solutions that make it easier to keep up with rate fluctuations such as subrogation offers the possibility to choose every 2-3-5 years the best available rate. Or the so-called interest rate cap, which is in fact a variable rate following the market trend, but with maximum rate that cannot be overcome.
Check the Best Mortgage Rates
Finally, it always advisable to check the best mortgage rates and to use a loan comparator to see what is better for you.