What a loaded question?  Strictly looking at the numbers. The current rates are in favour of a variable rate product, with an average of about 1.8% difference between the two rate types. (at the time of writing)  However, is that enough incentive for those already in a variable, to remain in a variable?  Is it enough of a difference to entice people into a variable rate mortgage?

It is well known that on average, people save more money in a variable rate mortgage.  Unfortunately , in times of uncertainty that re-assuring prediction doesn’t bring people much comfort.  So let’s look at the basics as well as some points for both.

FIXED: PRO’S

• Predictable payment amounts – Your payment stays the same. Whether rates rise or fall, there is no changes in your monthly payment amount.

Cost certainty is really the only benefit to a fixed mortgage.

FIXED: CON’S

• Higher discharge fees – If you need to discharge the mortgage before the end of the term.
• Higher rates – Fixed interest rates are almost always higher than variable.
• Sell your house – Some fixed products have no refinancing options, leaving you in the position of having to sell your house if you need to get out of the mortgage.

The discharge fees in a fixed mortgage can vary substantially between lenders.  You need to make sure your lender doesn’t calculate payout penalties based on an IRD (interest rate differential) This is where your mortgage professional comes in.

VARIABLE: PRO’S

• Lower interest rate – Variable interest rates are generally referenced as Prime +/- a percentage.  Because of the uncertainty they are generally priced more competitive.
• Flexibility – Should you want to change mortgage providers for any reason, you simply have to pay a 3 months interest penalty. (among other costs eg. lawyer etc, but these fees apply to a fixed discharge as well)
• Rates go down, payment goes down – If the interest rate drops then your payment will also drop.

Variable products have a lot of upside.  However, that also includes the rates.   The question comes down to timing.

VARIABLE: CON’S

• Fluctuating payment – If the interest rate goes up your payment will as well.  There are products to combat this, however for simplicity we will save that for your call with a mortgage agent.

Variables have only one negative and that is the uncertainty.  However, generally this can be overcome with planning and fiscal responsibility.

For example, if your finances are predictable, and you can withstand an increase in interest rates you could take the variable and save the difference between the fixed and variable rate.

So, if you have a $600,000 mortgage and your payments at the variable rate of prime – 1% (1.7%) are about $2400/month. And the fixed rate is posted at 3.5% and the payments roughly work out to $3000/month.  Take the extra $600/month and put it in a savings account in the event rates go up.   Then you can use the extra money you put away towards the increased payment.  Remember, the rates would have to go up by 1.8% just to be on par with the fixed rate.  If the rates don’t go up, or maybe they even drop. You would have a minimum surplus of $36,000 at the end of your 5 yr term.  What could you do with that?

Its part of our job as mortgage professionals to advise you on the right products for your situation.  When it comes to the fixed or variable conversation, it really does depend on the individual themselves.  This is why sitting down and asking the questions with a mortgage professional will help you better understand which product may be right for you.

Biggest question is, can you make accommodation’s if the rate does go higher?  If the answer is yes, then there is no question in my opinion a variable is for you.

Written by Derek Cole