Differences in Fixed Rate Mortgages and Other Mortgages

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.

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.

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.

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.