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What's the difference between fixed and variable rate?

And which one suits my needs best?

Image: Shutterstock

HERE’S WHAT YOU need to know.

A fixed-rate mortgage guarantees the rate that you will pay for a fixed length of time. Your monthly repayments will stay the same for an agreed period, which may be anything from one to 10 years, and you usually won’t be able to make any lump sum or early repayments. This gives borrowers certainty and makes it easier to budget monthly mortgage payments.

With a variable mortgage, however, your monthly repayments will rise and fall as market interest rates change over the term of the loan. You can also make early repayments to pay off the loan and reduce the overall cost of the mortgage, or you can extend your mortgage without paying any penalties.

Is one option better than the other?

Both come with their benefits and drawbacks, so it’s a matter of choosing the option that suits your needs best. A variable rate mortgage is typically thought of as a more flexible option than a fixed-rate mortgage, but you’ll need to be prepared for changes to your monthly repayment amount over time.

And while a fixed loan protects you from interest rate increases, you could also miss out on lower interest rates and could end up paying more in the long run.

You may be able to combine the two options with a split-rate mortgage, where a portion of your mortgage will be on a fixed-rate contract and the other will be variable.

About the author:

Sarah Harford

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