Adjustable Versus Fixed Rate Mortgages


One of the biggest decisions you will need to make when buying a home or property is what type of mortgage to choose. Your main choices will come under the umbrella of either a fixed rate mortgage or an adjustable rate mortgage.

Both of these mortgages have pros and cons, and your personal circumstances combined with your personal preference will help to determine which of these mortgage types you opt for.

Adjustable vs Fixed Rate

Fixed Rate Advantages
A fixed rate mortgage is very popular with those that want the peace of mind of fixed repayments for a specified period or for the life of the loan. If you are on a fixed income, if you plan to stay in the property for some time, or if you simply prefer fixed repayments for easier budgeting, a fixed rate mortgage can prove ideal. Although the initial rate is set higher than an adjustable rate mortgage, your can rest assured that your payments will remain the same each month even if interest rates rise.

Adjustable Rate Advantages
On the other hand, an adjustable rate mortgage offers a lower initial interest rate, which means that property purchasers can start on low monthly repayments. This type of mortgage means that you can also benefit from falls in the interest rate, as your payments are not fixed, although it also means that you are subject to rises in repayments as the interest rates go up. If you want to enjoy lower initial repayments or if you are planning to stay in your property for a shorter period, you could benefit from an adjustable rate mortgage.

Both of these mortgage types are very popular, and because there are benefits and disadvantages with both of these mortgages it is important to look at the whole picture and also to take your circumstances into consideration before making a firm decision. For instance, if you are on a fixed income or you plan to stay in your new property for some time, a fixed rate mortgage may be beneficial. If, however, you can afford to be flexible with repayments or if you are planning to stay in your new property for a shorter period, you may get more out of an adjustable rate mortgage.

To summarize, these are the main pros and cons of fixed and adjustable rate mortgages:

Fixed Rate Mortgages (FRM)

  • The peace of mind that comes with fixed monthly repayments
  • Easier budgeting due to fixed repayments
  • No worry about rising repayments when interest rates rise
  • Ideal for those on fixed incomes, those that want peace of mind, and those that want to enjoy more manageable budgeting
  • These mortgages will not benefit from falling interest rates
  • The initial interest rate is set higher than with an adjustable rate mortgage
  • There is not as much flexibility with FRMs (Fixed Rate Mortgages) as with ARMs (Adjustable Rate Mortgages)

Adjustable Rate Mortgages (ARM)

  • The starting interest rate with this type of mortgage is lower that that on a fixed rate mortgage
  • An affordable mortgage solution for those looking to stay in their property on a short term basis
  • Subject to repayment reductions when interest rates fall
  • These mortgages are also subject to repayment increased as interest rates rise
  • Can make budgeting difficult due to unpredictable repayments based on interest rate rises
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