A variable rate mortgage is a mortgage in which the interest rate on the outstanding balance changes periodically. Typically, these loans will have fixed, or “teaser” interest rates for a specified amount of time, after which the interest rate will change based on a variety of factors. In most cases, the initial interest rate on a variable rate loan will be lower than a fixed rate, which can be appealing for homebuyers. But it is important to be aware of the pros and cons before jumping into a variable rate loan.
The number one advantage of a variable rate mortgage is flexibility. With a variable rate mortgage, you don’t need to worry about penalties for things like increasing your monthly payment, or paying off your mortgage early. You also have the ability to make lump-sum payments on your mortgage throughout the year, which can be very helpful for home buyers with a fluctuating income affected by bonuses or commissions. If your life is likely to change relatively soon, and you plan on eventually moving or selling the house, a variable rate mortgage might be right for you, as it gives you the ability to take advantage of low introductory rates in the first few years.
Your rates could decrease
In Ireland, your variable rate mortgage is usually based on the interest rates of the European Central Bank (ECB). This means that when the ECB rates rise or fall, your lender will adjust the rates accordingly. If the interest rates decrease over time, so will your monthly repayment. For this reason, variable rate mortgages can be advantageous for buyers anticipating a decrease in interest rates over the lifetime of their loan.
Your rates could decrease
Similarly, if the ECB interest rates increase, your monthly repayments will as well. This could leave the buyer stuck paying well above the rate they would have been locked into with a longer term, fixed rate mortgage. These interest rates are difficult to predict, and if you would have trouble making the higher repayments if the market rates were to increase, it might be a better idea to avoid the risk and choose a fixed rate mortgage.
Unpredictability and Complexity
The market interest rates are fairly unpredictable, which could spell bad news for buyers if they rise quickly over a short period of time. Due to fluctuating payments, homeowners might have to adjust their household budget on monthly basis to account for this. Variable rate mortgages are also much more complex than fixed rate loans. These complexities can pose risks to borrowers who don’t know what they’re getting into, so it is always a good idea to talk to a financial advisor or mortgage broker to explain in detail the terms of your loan.