To gain an understanding about why there is an interest rate difference between variable and fixed-rate mortgages, you have to try to stand on the other side of the desk. The lender has to gauge the risk involved when setting interest rates, and there is a difference in risk between writing a variable interest loan and a fixed-rate one.
When a lender deals in fixed-rate mortgages and the rates are currently low, they have a higher potential to lose out on interest if the rates later increase substantially. They could face 15 or 30 years of low interest rates and have mortgages they have little chance to sell to another lender. Their money is tied up in your home at a return far less than they could have enjoyed had a variable interest amount been involved. It is for these reasons that the initial interest rate on fixed-rate mortgages is usually higher than that on variable mortgages. On the other hand, when interest rates are high, lenders are thrilled to write fixed-rate mortgages as they expect rates will go down, not up.
You’ll also see some interest rate differences on variable mortgages depending on how often the rate is to change to market conditions. The longer a particular rate is locked in, the more risk to the lender, so the upfront rate is likely to be higher.
As a borrower, you face risk, too, and need to make your decision accordingly. Are you more comfortable having a fixed rate that you can count on for the duration of your mortgage or would you prefer a smaller mortgage payment at the onset with the understanding that it could change over the course of your mortgage? At Donna Mullen & Associates, we take the time to explain your options and the differences between variable and fixed-rate mortgages, so you can proceed with confidence that you understand what to expect. Contact us today to learn more and get started on your journey to home ownership.