Which is the best home loan? Variable or fixed mortgage.

Which is the best home loan? Variable or fixed mortgage. So you found your dream home. You seem to be able to afford it. What interest rate type should you choose for your loan, variable or fixed. Even though it is one of the most asked question by home owners and borrowers it is surprising how many don´t understand the basic effects choosing one type or another will have on your mortgage, monthly payments and life in general.

Interest rates are the only reason banks and lending companies are crazy enough to lend hundreds of thousands of dollars, pounds and euros to complete strangers. Well interest rates, credit checks and securities are other good reasons also but lets focus on interest rates. The rate of interest when lending is such an important factor for the economic growth of a country it is regulated by the state. This rate is set as the price of money, or the price of borrowing money. If the rate is low, this promotes investment and entrepreneurship, if it´s high, it encourages people to save and loan money to others instead of borrowing it.

You have no control of the going rate of interest but you can choose to go variable or fixed. What is the difference?

Going variable means you simply take the risk of paying the interest rate that the state dictates, nothing more, nothing less. If the interest rate drops you will pay less, if it rises you will feel the pinch. The advantage to this type of interest rate is that you don’t pay an extra premium. On the long run, barring any major economic meltdown(oops, we are having one now!) should be cheaper. Even when the economy goes south countries tend to keep interest rates down to promote economic recovery. So, all things being equal you should end up saving money if you choose a variable interest home loan. The only downside is that in the short to mid term your monthly installments could vary quite a bit. If you have a relatively fixed income, variability in your budget could be hard to deal with.

That is where fixed interest rates come in. With this loan type you are guaranteed a fixed rate for the entire tenure of the loan. This is a great advantage for those that like to know exactly what they are spending and will be spending for the foreseeable future. The only con to this type is that you are nearly guaranteed to pay more for the privilege of budgeting. The reason for this is that banks want to hedge their investment and guarantee they will not lose money on your loan. For example, if the interest rate rises over and above your fixed interest rate they will be making less money with you than what they could make elsewhere, not a good option for a bank if they want to stay in business. In order to protect them from this you will have to pay a higher interest rate if you choose a fixed interest type. Which is the best type? Now you know the facts your personality and financial circumstances should decide for you.