Adjustable Versus Fixed Rate Mortgages

Floating vs Fixed Rate Mortgages! How many of us know here what is good for us in the future. Retrospectively everything and anything can be analyzed, but looking into the future we will need a crystal ball to say what kind of a rate is better.

Fixed rate Mortgage has a fixed rate of interest on your mortgage over the entire period of the mortgage (don’t forget to read the fine print, because sometimes the fixed rate is also not fixed and there maybe a clause that in case of extreme market movements of interest rates the interest rates can be revised).

Floating rate Mortgage on the other hand has an interest rate that is pegged to a benchmark (like a bank’s PLR or some other standard) and it keeps on fluctuating with the benchmark. If the benchmark goes up, you interest rate goes up and vice versa.

So what is good for you. Very difficult to say, for it depend on your tenor and your ability to repay the loan.

(1) Tenor of the Loan: If you are going to take a mortgage which is for a long term (20 years) Fixed Rate maybe a good option for you. For you can expect the fluctuations in the interest rate to average out in case of floating rate loan. However, this is too long a period and if there is sudden hike in the interest rate in the long term due to inflationary pressures you stand to lose out. Floating rate mortgage is attractive if your tenor is short term (t have the flexibility assuming the interest rates go up, go in for a Fixed rate.

Call me conservative if you like, but a better planning and budgeting demands that you opt for the Fixed rate mortgage. However, you need to weigh out your options and circumstances before taking a decision.