More and more people are opting for fixed rate loans today because they offer stability and peace of mind in a volatile housing market. That being said, there are pros and cons to each type of rate and the best fit is entirely dependent on individual financial status.
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 when you want to top up, extend or pay off your mortgage and you could benefit from falling ECB rates (if your lender responds to them).
Cons: Variable rates don’t offer stability or predictability, meaning that you are at the mercy of changing rates. Yes, your rate might go down but equally it could go up. Rates changes are difficult to predict 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 and knowing exactly what you’re going to be paying every month 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 floating variable rates will fall over that period of time, leaving you stuck paying more than you have to. Another drawback of fixed rate mortgages is the fact that you may be hit with penalty fees if you want to increase your monthly repayments at any stage.
To fix or to vary?
From reading the above you might find it easy to conclude that for most people, flexibility would win out over predictability when it comes to variable versus fixed rate loans. Financial circumstances are easily changeable and knowing that you have options concerning your mortgage repayments can bring a lot more peace of mind than the predictable, but immovable nature of a fixed rate loan.
However, consider that nowadays an increasing number of mortgage borrowers are opting for fixed rates over variable rates. In fact, the net value of fixed rate mortgage drawdowns has been increasing steadily since the beginning of 2015.
Why are more people opting for fixed rate mortgages?
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 fixed rate mortgages.
Another reason could have to do with how Irish banks have been reacting to the European Central Bank's interest rate.
The ECB's main rate now stands at 0.00%, but Irish banks have shown a reluctance to cut their standard variable rates in response. This could cause borrowers to be sceptical about the possibility of a sudden slash in variable rates from Irish banks, and leave them favouring marginally more expensive, but guaranteed, fixed rates.
Before you decide, always compare!
Taking out a mortgage can be a very stressful and nerve-wracking time. Choosing a fixed rate or a variable rate is one of a number key decisions you’ll make when buying a home 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