Mortgage Advice

Mortgage Interest Rates

There are generally speaking two main types of interest rate terms that you’re likely to hear when discussing mortgages:

• Fixed Interest Rate
• Adjustable Rate / Variable Interest Rate

Fixed Rate Interest

A Fixed rate interest mortgage is simply as the name suggests: the interest rate applied to the mortgage will not change for the length of the term agreed to. The length of that term will vary from lender to lender, country to country, and be largely influenced by market conditions at the time the mortgage is taken out.

Fixed rate mortgages make it extremely easy to budget from month to month, safe in the knowledge that your mortgage repayment is fixed no matter what the current market conditions. The obvious up-side and down-side to a fixed rate mortgage is that you could be either a winner or a loser depending on what the interest rates do over the life of your mortgage. If you have a fixed rate at 8% for the life of your loan, but interest rates drop to 4%, you’ll still be paying the higher amount. But of course, the opposite can also hold true – should the interest rates rise over time, you’ll still be paying the lower rate.

Adjustable Rate / Variable Rate Interest

Adjustable rate or variable rate interest loans allow the mortgage lender to set the interest rate to whatever market conditions demand at any given time during the life of the mortgage. The attraction of variable interest rate mortgages is that you can benefit from any future drop in market interest rates, as you monthly mortgage repayments will be reduced to reflect the market changes. However, the opposite also holds true, that if the market decides it’s time for interest rates to rise, so too will your mortgage repayments. Make sure you fully understand the consequences of a variable interest rate loan if you are considering taking one out. If interest rates rise dramatically, you could find yourself in financial difficulties, so take the time to work out your repayments if the interest rates were to double at some point. At least then you’d have an idea of what your mortgage might end up costing you.

Mixed Fixed Rate and Adjustable/Variable Rate Mortgage

In many cases, it is possible to arrange a mortgage where, for a set period of time, the interest rate is fixed. When this term is up, the mortgage interest rate reverts to a typical variable rate.

The major benefit from this type of arrangement is that it enables many mortgage holders the opportunity to know exactly what their mortgage is going to cost for the first few years so they can budget accordingly. Typically, the interest rate offered for the ‘fixed’ portion of the term of the mortgage will be slightly higher than the variable rate. This is the bank’s way of hedging their bet, so to speak, but it should not be so high as to make it unrealistic. If interest rates rise over the period of time that your mortgage rate is fixed, your interest payments will be unaffected by the rise. If they remain high past the expiration date of your fixed period, then you will revert to the higher rate at that time (and conversely, if the interest rates go lower you’ll revert to the lower rate).

Interest calculated daily, monthly…

The frequency of interest charged against your mortgage will have a major impact on the amount of money you end up paying back over time.

Generally speaking, the more frequent the calculation (daily), the better it is for you in the long run. Any payments to the mortgage take effect from that day, rather than at the end of the month if the mortgage interest was calculated on a monthly basis.