For many individuals, owning a home is a significant milestone, and securing the right mortgage plays a pivotal role in this achievement. Among the various mortgage options available, a variable mortgage, has gained popularity in the last few years due to its unique features and the low interest rate. However that changed last year as the interest rate has risen substantially making it an expensive product. Unlike traditional fixed-rate mortgages, variable mortgages offer adjustments based on prevailing market conditions.
In this blog, we will explore the pros and cons of variable mortgages, empowering prospective homeowners to make informed decisions about their financial future.
How Variable Mortgages Work
Variable mortgages are structured into an adjustable-rate. The interest rate fluctuates periodically as per market rate dictates.
The Pros of Variable Mortgages
1. Lower Rates if applicable at the time of getting the mortgage: The primary attraction of variable mortgages lies in their lower interest rates per market rates. This can translate into more affordable monthly payments, making homeownership accessible to a broader range of borrowers. This usually oocures when market rate is low.
2. Potential Cost Savings: In certain economic conditions, variable mortgages can lead to cost savings compared to fixed-rate mortgages. If interest rates decrease or remain stable borrowers can benefit from paying less interest over time.
The Cons of Variable Mortgages
1. Interest Rate Volatility: The most significant risk associated with variable mortgages is the uncertainty of future interest rates hike.
2. Negative Equity: If property values decline while homeowners are in a variable mortgage, they may end up owing more on their mortgage than their home’s current market value. This negative equity situation can hinder their ability to sell or refinance the property.
3. Refinancing Challenges: In a rising interest rate environment, refinancing from a variable to a fixed-rate mortgage might become difficult or expensive. This can leave borrowers stuck with higher rates, negating the potential benefits of the initial lower rates.
4. Increase of the amortization period. If the mortgage payments are fixed the borrowers can end up paying for the mortgage for many more years than originally anticipated when the mortgage was obtained.
Considerations for Borrowers
1. Risk Tolerance: Borrowers should assess their risk tolerance and financial capacity to handle potential interest rate fluctuations. If they prefer stability and predictability in their finances, a fixed-rate mortgage may be a better fit.
2. Economic Outlook: Understanding the current economic climate and potential interest rate trends can help borrowers make informed decisions about the timing of their mortgage application.
3. Psychological and Financial Stress. The uncertainty associated with variable mortgages can lead to psychological and financial stress for borrowers. Constantly worrying about interest rate changes and their impact on monthly payments can affect homeowners’ overall well-being and financial peace of mind.
Conclusion
Variable mortgages can be a compelling option for borrowers seeking lower initial rates and potential cost savings. However, they come with risks, especially in todays market particularly in the form of interest rate volatility and potential payment shock. Borrowers must carefully consider their financial goals, risk tolerance, and future plans when deciding between a variable and fixed-rate mortgage. Seeking professional advice can provide valuable clarity and help borrowers navigate the complexities of variable mortgages to make a well-informed choice. With a clear understanding of the benefits and risks, prospective homeowners can unlock the potential of variable mortgages to achieve their homeownership dreams.
Contact Eran Gevantschniter
A real estate lawyer in Toronto that can help you if you with real estate law matters and real estate transactions. We will be gladly happy to discuss with you the Unlocking the Potential of Variable Mortgages: Understanding the Benefits and RisksContact Eran Gevantschniter at ERANLAW.com to set up a meeting.