When your client applies for a mortgage, they have a choice between variable and fixed interest rates. What is the difference, and is one better than the other?
Variable Rates
A variable rate loan offers your client more flexibility than a fixed-rate loan. They usually come with a variety of features, enabling your client to adapt to changing financial situations. For example, most variable-rate loans allow your client to make additional repayments to pay off their loan faster. Your client can then redraw these additional repayments if they need extra funds in the future. Variable-rate loans may also have an offset account, allowing your client to reduce the amount of interest they pay. The downside of variable rates is that the interest rates can change at any time, affecting your client’s repayment amount. This change can prevent your client from planning ahead.
Fixed Rates
A fixed rate can give your clients peace of mind because their minimum repayment amount will be the same every month for the duration of the fixed-rate period, allowing them to stick to a budget better. Most fixed-rate loan periods can be chosen by your client; however, the maximum is usually 10 years. At the end of the fixed period, the interest rate will generally switch to a variable rate. However, your client can extend the fixed-rate period if they choose to. Fixed rates are great to protect your client from rising rates, but if the interest rate drops, they will be stuck paying higher interest rates. In addition, if your client wants to pay off their loan before the end of the fixed-rate term, they may have to pay break costs.
Before your client fixes their interest rate, they should consult with you. You can partner with us at Mortgage Street to find a loan with the best interest rate, whether fixed or variable.