Choosing between variable interest rate or fixed interest rate loan can be quite complicated. If you are a loan seeker who wants to make the best decision, you should consider a few factors. They are listed here.
- How Long Do You Plan to Live in the New Home?
If you like to keep changing homes and you are planning to sell off the new home you are seeking soon, you should consider a loan with the variable interest rate. As the payments are lower in the initial months, you can stay away from making hefty payments for the time you are living in the home.
In contrast, if you are planning to live in the new home for more than 7 years, you should seek a mortgage with a fixed interest rate. It will ensure that you pay a specific amount over a long period and don’t need to change your standard of living.
- How Many Fluctuations Can You Tolerate?
The decision of choosing between a loan that has a variable interest rate or fixed interest rate also depends on how much fluctuations you can tolerate. Some people have a fixed salary or income level. Those people will be better off if they choose a fixed rate loan. The interest rate of these types of loans usually remains the same over time.
In contrast, people who have multiple sources of income or can arrange money suddenly can go for a loan with a variable rate. Though the probability is low, a scenario may happen in which the loan interest might shoot suddenly, and you would have to pay a lot of money as interest suddenly if you opt for variable rate loan.
- Do You Want to Keep the Overall Cost Low?
If one looks at the history of loans in Canada, it is clear that fixed rate loan options cost more than variable rates. So, if keeping the overall cost of the loan low is vital for you, you need a loan with a variable rate only. The probability is high that the overall cost of such a loan would be lower than fixed rate loan, but again, there are no guarantees.
- How Much Risk Can You Tolerate?
The risk factor is quite high with a loan that has a variable rate as compared to a fixed rate loan. The percentage of interest you need to pay can be quite low one day and very low the next day. So, you should have a look at the maximum possible rates for both the types of loans before making a decision.
- How Much Safety Do You Need?
Some people can’t sleep peacefully at night when they know that mortgage rates may change at any time and they might have to pay more money suddenly. If you are one of these people, then fixed rate mortgages are a good choice for you.
In contrast, some people are fearless when it comes to money and don’t worry about the future. If you are one of them, then variable rate mortgage options are right for you. Always choose a loan option that brings you peace of mind. After all, there is no point in taking a home loan if it prevents you from enjoying your life in the new home.
- What is the Economic Situation Like?
The domestic and global economic situation plays a key role in deciding mortgage rates in Canada. So, when you seek the better option from fixed vs. variable mortgage, you should keep up with the economic realities of the world. This will help you in predicting how much your loan interest would change with time and prepare you for unexpected changes.