The first step before applying for a mortgage is to decide what type of interest rate you want, and which will be a better one to budget monthly cash flows.
Fixed rate or Variable rate
Fixed rate refers to the interest rate that remains unchanged for the entire mortgage term. Accordingly, the mortgage payments also remain the same throughout the term. This helps in planning your monthly expenses well without having the risk of changes in the monthly outgo.
Variable rate is linked to Prime Lending Rate set by your bank, which is also referred to as ‘Prime Rate’ of ‘Prime’. Variable rate is commonly quoted as Prime ‘plus’ or Prime ‘minus’ a percentage (for example Prime +0.20% or Prime – 0.25%). Banks change Prime rate according to the changes in market conditions. With a change in the Prime rate, the effective interest rate also changes resulting in a change in the , mortgage payment too. If the variable rate goes down, your regular payment will contribute more towards your Principle, and if it goes up, it will increase your Interest payments.
We discuss with our client about their financial standings and income projections vis a vis their risk appetite so that that they can decide whether to go for Fixed Rate or Variable Rate mortgages.