Variable or Fixed Installment Payments
The debate over variable vs. fixed interest rate mortgages and loans will continue as long as people want to lend and borrow money. The impact on installment payments can be significant depending on the interest rate fluctuation and the type of mortgage you sign up for. Installment payments can go in either direction up or down as the interest rates change, however when they are moving up quickly should you lock in your interest rate? How high will they go? How much can you afford to pay each month? How much risk can you tolerate?
Some of us remember back in the early 80′s when interest rates hit 21% for anyone taking out a new mortgage. If you had a variable rate mortgage at that time , you were paying interest at 21%, while your neighbor might have been paying 15% because he locked in his interest rate 2 months earlier. Both were very high and scared a lot of people as well as cost them a lot of money. Hopefully interest rates will never go that high again.
Both the US government and the Canadian Government have predicted that interest rates are going to begin rising again in the 2nd half of 2010, depending on how the economy is doing. These comments have once again sparked the discussion about variable vs. fixed interest rate loans and mortgages. Monthly installment payments are going to rise, no question , but by how much? Usually at any given time, a variable interest rate mortgage has a lower interest rate than a fixed mortgage. But once interest rates begin to rise, the variable mortgage goes up while the locked in mortgage stays the same as do the installment payments.
The Case for Staying With Fixed Interest Rates
All of the banks have kept interest rates low over the past while in order to stimulate the economy and get people back to work. As a result loans are cheap, mortgages are cheap and consumers are beginning to get back on their feet. Although the economy is beginning to improve, many financial people feel that it will be the 3rd quarter of 2010 before interest rates begin to rise. The timing is not exact, however the experts feel that inflation will begin to raise its ugly head soon and the only way to manage this is to raise interest rates.
Should you lock in now? Should you wait for another couple of months.? Have interest rates already started to rise? If you lay awake at night worrying about this, then why put yourself through that agony. Lock in as soon as you think the banks are going to raise the rates. You might give up a few months of lower interest by not sticking with a variable interest rates, but at least you know that your monthly installment payments will be fixed and you can manage your budget without having to set aside more money for the mortgage.
The Case for Staying With Variable Interest Rates
It is all about timing with regards to switching from a variable interest rate to a fixed rate mortgage. Variable interest rate mortgages are pretty much consistently lower interest rate vehicles and consumers can save quite a bit of interest if they are prepared to take the risk of sticking with a variable interest rate mortgage. As soon as the banks raise the rates, your monthly installment payment will rise the very next month.
Some experts feel that the banks are wrong about inflation. They feel that it will be well into 2011 before inflation takes hold and it is necessary for the banks to raise rates to combat inflation. Of course you can monitor the ongoing direction of interest rates, pay attention to the results of the meetings the US Fed hold and the Canadian Bank of Canada holds to assess the timing of the change in interest rates. You might miss the first increase simply because the banks try to anticipate what the government is going to do, however you can make the leap anytime into a fixed rate mortgage. Once you do your monthly installment payments will be locked in.
Have a discussion with your local bank manager or mortgage officer if you are concerned. He or she can monitor the situation on your behalf and may be able to assist you just as interest rates begin to rise.
Conclusion
So what is the right choice ? The answer is that it depends on your personal situation. Some of the other factors that people will consider is the level of risk they can tolerate. If they worry about the interest rates changing they can dispel that worry easily and by locking in. If you do not have a lot of leeway in your monthly budget plan, then an increase in installment payments could make life difficult. You may want to lock in so that you can plan accordingly. The peace of mind and the stability you get from moving to a fixed interest rate mortgage will more than off set the slight increase in monthly installment payments.
If the economy does not heal as fast as everyone expects, interest rates could stay low for some time, perhaps even into 2011. As a variable rate mortgage is usually lower than a fixed rate mortgage, consumers could benefit into early 2011 with a variable interest rate mortgage. Installment payments would be marginally lower and consumers could benefit as a result.
One last point. With interest rates staying low for some period of time, now is the time to take advantage of making extra payments on the mortgage to drive a shorter overall term and ultimately lower your monthly installment payments. Most variable mortgages allow customers to pay as often and as much as they wish. Fixed rate mortgages usually have provisions in them which will allow single payments or allow you to increase your monthly payments by 10 or 20%. This is an excellent way to pay off your mortgage more quickly and manage your monthly installment payments as part of your family budget.
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