Now that you have decided to apply for a mortgage and become a homeowner, there are two choices in front of you. You can either go for a fixed or a floating interest rate. It is never the case of one being so much better than the other. It is just a case of how the market is and what kind of a mortgage you would be comfortable paying off. For the most part, apart from the obvious difference there are a few more things that you should know about and consider before making your decision.
Fixed mortgages are generally on the higher side and will remain the same for the duration of the repayment period, while floating rates are generally lower, but cannot be trusted to stay that way. They will be fixed for a few months or years and then will begin to vary after that. They follow a particular market index, hence, there is an inherent risk attached with it.
Risk or stability?
Among the most important factors that will decide what kind of mortgage you will be going in for is the level of income you expect in future, the volatility of the market and your tolerance for risk. Just because the word risk is being thrown around a lot does not mean it is being portrayed as a negative. Variable interest rates can be rewarding if the circumstances are right. If the market is on a low now and is expected to be that way for a few years, your monthly payment is likely to be low for those years before the market picks up.
What kind of a person are you?
There are two kinds of investors in any market; the risk averse and the risk lovers. You need to know if you can handle the risk involved, so ask yourself whether you are the sort of person who is likely to lose sleep over the rise and fall of market tides, or does it excite you? Are you the kind of person who would rather have a stable, long term plan and stick with it? If you can answer that, you will automatically know what kind of mortgage to go for. Apart from your personality there are a few more things to consider.
How are your career prospects?
Is your job or business, if you are self employed, looking bright in the coming years? Are you likely to gain a good amount of money? You should be sure that you can afford a sudden spike in interest rates without it eating into your budget, and if it does, you should be able to stay afloat without falling into debt. So be aware of the ceiling rate of interest, this is the rate beyond which the mortgage will not rise even if the market does. You can make your worst case calculations based on the ceiling rate. Mortgages do not normally reach that level, but it will be safer for you to be sure.
Rates are abnormally low right now, so it may seem like a good option to go for a variable interest mortgage. It is never a good option to go for a mortgage when the market is going through abnormal conditions, high or low. If you must, it would be a better option to go for a fixed mortgage. Both kinds of mortgages can be changed to the other in the middle of the repayment period, but this comes at a cost. There will be paper work and fees, but in the long run you can save some money. So always remember to prepare for the worst while expecting the best.