When purchasing a home, it’s important that you have all the knowledge you need to make an informed decision about the type of mortgage that will best suit your needs, and knowing the difference between a fixed-rate mortgage and a variable-rate mortgage, can help you do that:

What is a fixed-rate mortgage?

Featuring a single, fixed interest rate through its’ entire duration, monthly payments of a fixed-rate mortgage remain the same, no matter what happens to the market and any other variables.

If you’re looking to save money and create a manageable budget for monthly expenses, a fixed-rate mortgage offers consistency that a variable-rate mortgage – or adjustable-rate mortgage – simply does not.

What are the advantages of a fixed-rate mortgage?

Knowing exactly how much you will have to pay for your mortgage each month is a distinct advantage, and one that sees many homeowners select this type of mortgage over others. Its amortization period and predictable payments also help you to determine when your payments are due and how much money you’ll need to pay to your lender.

With both consistent principal payment amounts and the amortization period, you can easily calculate how much you can afford each time to either pay off your open mortgage early or budget for every payment efficiently.

What are the disadvantages of a fixed-rate mortgage?

While there are very few disadvantages to fixed-rate mortgages, the initial pay-out is perhaps one that ought to be factored in when deciding which type of mortgage to choose. With high costs for extra security and the possibility of changes to prices, it’s always worth keeping in mind the potential for prices to fluctuate.

One other point to consider is that fixed-rate home loans have higher introductory rates than other loans. Homeowners pay more upfront for a single rate that will be locked in for the duration of the loan period. Homeowners insurance premiums and government taxes can still cause fixed-rate mortgages to change, and while changes in your property taxes or homeowner’s insurance plan can affect your mortgage, your chosen lender will not be able to determine these increases. Should your insurance premiums go up or taxes alter, you’ll typically be notified by your provider, who will go on to pay any outstanding balances on your behalf. If not, you may need to be prepared for higher rates.

Which should you choose: fixed rate or variable?

Despite the fact that these types of mortgages work in similar ways, they both offer a variety of different pros, cons and cost options, and determining which will best suit your current and projected circumstances, is not always an easy task. However, a conversation with a local mortgage broker can help put things in a perspective that’s easier to make sense of, and enable you to make an informed choice that’s right for you and your financial situation.

The unpredictability of a variable-rate mortgage can mean that you pay out significantly more to your lender on some months than you do on others, and while they are cheaper initially, evolving interest rates can make your charges exceed those initial savings made.

One way of deciding whether to choose a fixed or variable rate mortgage, is to think about how long you plan to stay in your home. If you plan to be a long-term resident (let’s say for 15 to 30 years), then a fixed rate mortgage might be a better idea. Whatever your circumstances or future plans, be sure to tell your mortgage broker everything they need to know to help you make the right decision.