The pros and cons of variable and fixed-rate mortgages
More and more people are opting for fixed rates over variable rates because they offer stability and peace of mind. That being said, there are pros and cons to each type of rate.
You might know the difference between a variable and a fixed-rate mortgage (if you don’t, click here) but do you know the advantages and disadvantages of each? And do you know which rate would be best suited to your needs?
In this guide, we discuss the pros and cons of variable and fixed-rate loans and also look at why more and more people seem to be opting for fixed-rate loans these days.
Flexibility is definitely the greatest asset to a variable rate. You don’t need to worry about penalties if you want to increase your monthly mortgage repayment, pay off your mortgage early, or switch to another lender and you could also benefit from falling ECB interest rates (if your lender responds to them).
Variable rates don’t offer stability or predictability, meaning you're at the mercy of changing rates. Yes, your rate might go down over the term of your mortgage but equally it could go up! Rate changes are difficult to predict and a lot can happen over a 20 or 30-year mortgage term so you could be putting yourself in a financially vulnerable position by choosing to go with a variable rate.
Fixed-rate mortgages bring certainty, and that can be worth a lot to many house-hunters. Mortgage repayments tend to be the biggest monthly outgoing for most households so knowing exactly what you’re going to be paying every month for a fixed period of time can bring peace of mind and really help with budgeting.
If you lock yourself into a fixed rate for say, 20 years, there is a chance that interest rates could fall over that time, leaving you stuck paying more than you otherwise would have. Another drawback of a fixed-rate mortgage is that you may be hit with penalty fees if you want to increase your monthly repayments at any stage.
If you receive a lump sum and want to use it to knock a chunk off your mortgage, you may also be charged an "additional funding fee" for doing so. These fees don’t apply to variable-rate mortgages. However some banks now allow you make an overpayment of up to 10% of your outstanding balance each year without being penalised.
Similarly, you may be charged a breakage fee if you switch lenders or switch to a variable rate with your existing lender before your fixed-rate period has ended.
Another important thing when considering a fixed rate is whether you're going to move in the future, as you may incur a penalty here too. Some lenders will allow you carry your rate and mortgage balance to a new property, but it would mean that in order to avoid any penalty, you must stay with that lender.
Basically, if you’re committing to a fixed rate, it may only be worth it if you’re happy to stick to that rate and repayment for the agreed term while staying in the same property.
Fixed rates, particularly those longer than 15 years, are also usually more expensive than variable rates as you're paying for the extra costs associated with fixing the payment over a number of years. In general the higher the fixed term you choose, the higher the interest rate so the higher your monthly repayment will be.
To fix or to vary?
Whether you choose to fix or vary will ultimately come down to several things such as:
- The value you place on stability and predictability
- Whether you think you'll want to increase your monthly repayments at some stage in the near future
- Whether you think you'll want to pay a lump sum off your mortgage at some stage in the near future
- Whether you think you'll want to switch mortgage at some stage in the near future
- Whether you think you'll want to move home at some stage in the near future
Why are more people opting for fixed-rate mortgages in Ireland?
Fixed rates have long been common in the rest of Europe so one could argue that the trend towards fixed rates here has been overdue.
Recent figures from the Central Bank of Ireland show that over 80% of new mortgages in Ireland are now fixed. This is a huge change from several years ago when around 80% of all new mortgages were on variable rates.
Fixed rates provide certainty - and in today's world that means a lot to many people.
Another reason could be the recent pricing of fixed-rate mortgages by Irish banks. As mentioned above, fixed-rates are usually higher than variable rates; the trade-off for the slightly higher rate initially is that you know it's not going to change for a period of time.
In recent times in Ireland, however, some of the best rates on offer have actually been fixed rates, which is unusual by international standards. As a result fixed-rate mortgage holders are getting peace of mind, stability, and better value, so it's unsurprising that more and more people are choosing them.
Before you decide, always compare!
Taking out a mortgage can be a very stressful and nerve-wracking time. Choosing between a fixed rate or a variable rate is one of a number of key decisions you’ll have to make and it’s important to have all of the information available before committing.
Whatever way you look at it, choosing what rate to go with is going to be a gamble. Irish property prices and global interest rate trends are notoriously difficult to predict, but by knowing the value you place on certainty and peace of mind, you will be in a good position to decide whether you should fix or vary your repayment rate.
And when it’s time to apply for your mortgage, you can submit an online enquiry through our new mortgage broker service and one of our experienced financial advisors will call you back to get your application started.
Don’t forget that to get mortgage approval you’ll also need to have mortgage protection insurance and home insurance, both of which you can also get right here on bonkers.ie. Head over to our insurance page to learn more.
Check out our other mortgage guides
If you found this guide helpful, make sure you take a look at our variety of other mortgage guides. You may be interested in some of the following:
- Many banks are incentivising customers with cashback offers on their mortgages. In this guide, we analyse whether or not these cashback offers represent the best value for homebuyers over the long term.
- Before applying for a mortgage, you’ll want to familiarise yourself with the Central Bank’s mortgage lending rules.
- If you already have a mortgage but are interested in switching, you can review the steps involved and see how much you could save in this guide.
- Finally, you can learn about how mortgage applications are assessed in this guide.
Get in touch with us
If you have any questions about the advantages and disadvantages of variable or fixed-rate mortgages, feel free to get in touch with us.