I realize this is a regularly discussed issue here in Australia, and I am relatively certain, in many other countries. In fact, in Australia, home ownership is one of the nation’s great dreams and is frequently discussed over the dinner table. While some European banks may be quite rigid still in the way they do things, the flexibility of loan structures in Australia is quite considerable and the competition between banking groups is fierce. Hence, there are some benefits fr the average consumer and I hope to assist with my take on these issues on the use of fixed and variable rates.
Benefits of Fixed Rates
Some people like the absolute certainty of fixed rates which is fine, but when the market is potentially still falling, in terms of the rates of loans potentially going down in percentage rates, it is wise not to lock all your eggs int one basket. Then again, if you are the kind of person who just wants absolute certainty, then fully locking might indeed be the way for you. However, it is good to have some flexibility with variable rates in a falling market because then, even though you can have a full guarantee of not paying more on part of the fixed part, you can benefit from reduced rates on the variable bit.
Naturally, in a rising market place of increasing interest rates, the fixed way is the way to go, but if you leave some section of your loan variably set, you can make additional payments over a threshold amount if you wish and not suffer a penalty. Most extra payments on a fixed mortgage can be no more than $10,000 per year, typically, but this will vary from bank to bank. In so,me European markets, you may only be able to make additional payments once every three months, after a prior arrangement with the bank, so it is wise to check these points.
Without doubt, in a market where the rates are falling, the variable method is the way to go. Of course, there can be risks if the rates go up markedly, and as I think I may have made clearer earlier on in this article, my general view is that it can be beneficial to go with a part variable and a part fixed set up so as to have the best of both worlds.
Regardless of your decision, always make sure that you can affords to repay your obligations even if the rates were to go up as much as 3% more as this way, you will have built in enough buffer to cover yourself which is always a great form of personal insurance for financial health and comfort.