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.
Pros: 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).
Cons: 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.
Pros: 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.
Cons: If you lock yourself into a fixed rate for say, 10 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 banks or switch to a variable rate with your existing bank before your fixed-rate period has ended.
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.
Fixed rates, particularly those longer than five 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.
Whether you choose to fix or vary will ultimately come down to several things such as:
The Irish housing market has been through a remarkably volatile and unpredictable period, and many believe we're still years away from reliable stability. This could explain why more and more borrowers are opting for the certainty of a fixed-rate mortgage.
Recent figures from the Central Bank of Ireland show that over 65% of new mortgages in Ireland are now fixed. Although high for Ireland by historical standards, this is still below the European average of around 80%.
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 a fixed-rate.
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.
You can compare fixed rates and variable rates on bonkers.ie now.