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Differences in Fixed Rate Mortgages and Other Mortgages

Lisett Comai-Legrand

Lisett Comai-Legrand About The Author

Jun 20, 2019 7:15:00 AM

When purchasing property or refinancing a home, a borrower should consider the various types of mortgages available to fit within their needs and their budget.  Listed below are a few different types of mortgages that are available to help you find the best type of loan to best suit your needs.

 Fixed Mortgage
A condition associated with fixed mortgages involves a constant interest rate throughout the time period of the mortgage loan. With fixed mortgages, the amount of money a person pays in a given time frame is pre-determined. A fixed rate mortgage is feasible for people interested in adjusting the monthly debt installments to their budget.

  • Advantage of a Fixed Mortgage - The monthly installments remain the same, regardless of the prevailing interest rate and the borrower is protected from unexpected interest rate increases.
  • Disadvantage of a Fixed Mortgage - A fixed rate mortgage can be more expensive as compared to an adjustable rate mortgage. If interest rates are higher, qualifying for a loan can be more difficult as the payments will be less affordable. Furthermore, if interest rates fall, those with a fixed rate mortgage would need to refinance to benefit from a lower rate.
  • An Important Consideration- A borrower may face penalties if they want to pay off the loan earlier than the predefined time period. Additionally, when selecting a mortgage loan make sure to consider all the factors as they will vary in terms of the different packages that are offered.
Discount Mortgage

The lender sets a Standard Variable Rate (SVR) independently and proposes certain discount offers for specific time frames; typically ranging from two to three years. The ratio between the discount and SVR proposed by a lender can be a bit trickier to handle in a discount mortgage.

  • Advantage of a Discount Mortgage - Monthly paybacks are comparatively less and they can be even lower if the lender lowers the SVR.
  • Disadvantage of a Discount Mortgage - The discount mortgage is a variable rate so your rates can go up and down over time.
  • An Important Consideration- The borrower needs to consider their budget in a way that it becomes feasible to cope with an unexpected fluctuation in the SVR. Such fluctuations are common in the case of a discount mortgage.
differences in fixed rate mortgages and other mortgages
Offset Mortgage

An off-set mortgage is set in conformity with the savings of the borrower. As a result, the borrower pays the debt for a lesser amount. For instance, if a person has a debt of $200,000 and savings of $50,000, then the debt will be paid for $150,000.

  • Advantage of an Offset Mortgage - It facilitates the debtor as it saves them time and money. Also, the debtor is not liable to pay any interest on the savings that is offset for the mortgage.
  • Disadvantage of an Offset Mortgage - The interest rate is higher as compared to fixed rate mortgages. Meaning, the borrower would need to set their budget accordingly.
  • An Important Consideration- It is comparatively more convenient for people who fall within a higher tax bracket as well as those with a considerable savings because the interest rates are higher.
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Capped Rate Mortgages

It is similar to the discount mortgage, except the lender cannot exceed SVR beyond a certain limit.

  • Advantage of a Capped Rate Mortgage - The borrower can budget for the increase in the SVR, as the highest SVR is predicated.
  • Disadvantage of a Capped Rate Mortgage - The cap is set comparatively higher.
  • An Important Consideration- Despite the SVR capping, the lender is free to change the rate anytime while staying within the cap limits.
In Summary

These types of mortgages offer an adequate solution for a person’s immediate need for money towards the purchase of a home. Acquiring a mortgage is a decision that requires much attention on the borrower’s behalf. It is always wise to meet with a mortgage professional at your financial institution when planning for your home financing. 

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We do our best to provide helpful information but we cannot guarantee the accuracy or completeness of the information presented in the article, under no circumstance does the information provided constitute legal advice. You are responsible for independently verifying the information if you intend to use it in any way. Additionally, the content is not intended to be reflective of First Alliance Credit Union’s products or services, for accurate and complete details about our product and service information you must speak to an advisor at First Alliance Credit Union.