Mortgage blogs:
1) Fixed vs. Variable Mortgages: Which One Fits Your Style
Choosing between a fixed-rate and a variable-rate mortgage can feel like deciding between comfort and risk-taking. Both options have their pros and cons, and what works for someone else might not work for you. Let me break it down, with a couple of relatable stories and a table to show how the numbers play out.
Story 1: Sarah’s Safety Net
Sarah is a cautious planner. She’s just bought her first home and locked in a fixed-rate mortgage. She loves the certainty of knowing exactly what her monthly payments will be, even if interest rates skyrocket. For her, peace of mind is priceless—no surprises, just steady, predictable payments. However, a year later, interest rates plummet, and her friends with variable-rate mortgages are paying hundreds less per month. Sarah’s happy to avoid the risk, but sometimes wonders, “What if?”
Story 2: Mike’s Gamble
Mike, on the other hand, thrives on flexibility. He went with a variable-rate mortgage because the starting interest rate was lower, and he liked the idea of saving more if rates stayed low. For a while, it was great—extra cash in his pocket for vacations and investments. But then rates began creeping up, and his payments started increasing. Mike had to adjust his budget on the fly. He says it keeps things interesting, but admits the unpredictability is stressful.
Breaking it Down: Fixed vs. Variable
Here’s a quick comparison to show how much your choice could cost over 5 years (assuming a $300,000 mortgage with a 25-year amortisation).
|
Scenario |
Fixed Rate (5%) |
Variable Rate (Starting at 4%) |
|
Monthly Payment |
$1,745 |
$1,576 |
|
Total Paid After 5 Years |
$104,700 |
$99,380 (if rates stay constant) |
|
If Rates Increase by 1% |
No change |
$102,210 |
|
If Rates Decrease by 1% |
No change |
$96,540 |
Factors to Consider
- Risk Tolerance: Are you like Sarah, who prefers stability, or Mike, who’s willing to gamble for potential savings?
- Economic Trends: If interest rates are expected to rise, fixed rates might save you money in the long run.
- Flexibility: Variable rates often allow you to switch to fixed later, but you need to stay on top of changes.
- Current Rates: Compare the fixed and starting variable rates—how big is the gap?
Takeaway
If you’re not sure what to pick, think about your personality and financial situation. Would an unexpected hike in payments cause major stress? Then fixed might be better. But if you’re okay with riding the wave of changing rates, variable could be your chance to save.
So, are you more of a Sarah or a Mike?