Why is a variable rate better?

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You might know the difference between a variable and a fixed-rate mortgage (if you don’t, click here) but do you know the advantages and disadvantages of each? And do you know which rate would be best suited to your needs?

In this guide, we discuss the pros and cons of variable and fixed-rate loans and also look at why more and more people seem to be opting for fixed-rate loans these days.  

Variable rates

Pros

Flexibility is definitely the greatest asset to a variable rate. You don’t need to worry about penalties if you want to increase your monthly mortgage repayment, pay off your mortgage early, or switch to another lender and you could also benefit from falling ECB interest rates (if your lender responds to them).     

Cons

Variable rates don’t offer stability or predictability, meaning you're at the mercy of changing rates. Yes, your rate might go down over the term of your mortgage but equally it could go up! Rate changes are difficult to predict and a lot can happen over a 20 or 30-year mortgage term so you could be putting yourself in a financially vulnerable position by choosing to go with a variable rate.

Fixed rates

Pros

Fixed-rate mortgages bring certainty, and that can be worth a lot to many house-hunters. Mortgage repayments tend to be the biggest monthly outgoing for most households so knowing exactly what you’re going to be paying every month for a fixed period of time can bring peace of mind and really help with budgeting.

Cons

If you lock yourself into a fixed rate for say, 20 years, there is a chance that interest rates could fall over that time, leaving you stuck paying more than you otherwise would have. Another drawback of a fixed-rate mortgage is that you may be hit with penalty fees if you want to increase your monthly repayments at any stage. 

If you receive a lump sum and want to use it to knock a chunk off your mortgage, you may also be charged an "additional funding fee" for doing so. These fees don’t apply to variable-rate mortgages. However some banks now allow you make an overpayment of up to 10% of your outstanding balance each year without being penalised.

Similarly, you may be charged a breakage fee if you switch lenders or switch to a variable rate with your existing lender before your fixed-rate period has ended.

Another important thing when considering a fixed rate is whether you're going to move in the future, as you may incur a penalty here too. Some lenders will allow you carry your rate and mortgage balance to a new property, but it would mean that in order to avoid any penalty, you must stay with that lender.

Basically, if you’re committing to a fixed rate, it may only be worth it if you’re happy to stick to that rate and repayment for the agreed term while staying in the same property.

Fixed rates, particularly those longer than 15 years, are also usually more expensive than variable rates as you're paying for the extra costs associated with fixing the payment over a number of years. In general the higher the fixed term you choose, the higher the interest rate so the higher your monthly repayment will be. 

To fix or to vary?

Whether you choose to fix or vary will ultimately come down to several things such as:

• The value you place on stability and predictability
• Whether you think you'll want to increase your monthly repayments at some stage in the near future 
• Whether you think you'll want to pay a lump sum off your mortgage at some stage in the near future  
• Whether you think you'll want to switch mortgage at some stage in the near future 
• Whether you think you'll want to move home at some stage in the near future 

Why are more people opting for fixed-rate mortgages in Ireland?

Fixed rates have long been common in the rest of Europe so one could argue that the trend towards fixed rates here has been overdue. 

Recent figures from the Central Bank of Ireland show that over 80% of new mortgages in Ireland are now fixed. This is a huge change from several years ago when around 80% of all new mortgages were on variable rates.  

Fixed rates provide certainty - and in today's world that means a lot to many people.   

Another reason could be the recent pricing of fixed-rate mortgages by Irish banks. As mentioned above, fixed-rates are usually higher than variable rates; the trade-off for the slightly higher rate initially is that you know it's not going to change for a period of time. 

In recent times in Ireland, however, some of the best rates on offer have actually been fixed rates, which is unusual by international standards. As a result fixed-rate mortgage holders are getting peace of mind, stability, and better value, so it's unsurprising that more and more people are choosing them.     

Before you decide, always compare!

Taking out a mortgage can be a very stressful and nerve-wracking time. Choosing between a fixed rate or a variable rate is one of a number of key decisions you’ll have to make and it’s important to have all of the information available before committing.

Whatever way you look at it, choosing what rate to go with is going to be a gamble. Irish property prices and global interest rate trends are notoriously difficult to predict, but by knowing the value you place on certainty and peace of mind, you will be in a good position to decide whether you should fix or vary your repayment rate.

You can compare fixed rates and variable rates from all mortgage lenders in Ireland on bonkers.ie now.

And when it’s time to apply for your mortgage, you can submit an online enquiry through our new mortgage broker service and one of our experienced financial advisors will call you back to get your application started.

Our mortgage service is entirely free and is fully digital from start to finish, meaning everything can be carried out online from the comfort of your home. And it's completely paper-free too! 

Don’t forget that to get mortgage approval you’ll also need to have mortgage protection insurance and home insurance, both of which you can also get right here on bonkers.ie. Head over to our insurance page to learn more.

Check out our other mortgage guides

If you found this guide helpful, make sure you take a look at our variety of other mortgage guides. You may be interested in some of the following: 

You can easily stay up to date on all the latest mortgage news and helpful advice with our blogs and guides.

Get in touch with us

If you have any questions about the advantages and disadvantages of variable or fixed-rate mortgages, feel free to get in touch with us. 

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The name says it all. A fixed-rate mortgage stays the same throughout the entire term of your loan. Your term is the length of your mortgage contract. It can vary from anywhere between a few months to 10 years.  

Generally, fixed-rate mortgages may have higher rates than variable-rate mortgages, but are a better option if: 

Interest rates are notably low now, and you want to secure your rate and avoid any potential future increases.  

You’d rather budget for predictable and consistent payments, generally with the same principal-to-interest ratio, regardless of market fluctuations. 

What’s a variable-rate mortgage 

A variable-rate mortgage fluctuates depending on the prime rate of your financial institution. The prime rates vary mainly according to the key interest rate issued by the Bank of Canada. Variable-rate mortgages are adjusted each month to reflect these fluctuations. It’s an interesting choice if: 

• You want to take advantage of a lower rate from the start and potential rate decreases during your term. 
• Your budget can handle an increase in your monthly payments or a reduction in the principal repaid in the event of rate increases. 

Capped variable rate 

A capped variable rate will fluctuate depending on the market but will never exceed a threshold established when you take out a mortgage. This option allows you to take advantage of rate decreases while protecting you from rate increases. You should note that there is usually an additional premium to pay for this type of rate. 

Fixed payments with a variable-rate mortgage 

Certain financial institutions will offer fixed monthly payments with a variable-rate mortgage. How does this work? If your interest rate decreases, you'll pay more principal and less interest, and vice versa if it increases. When rates reach a certain percentage, your financial institution will contact you to adjust your mortgage payments. 

Are fixed payments and variable rates the best of both worlds? 

Not necessarily. Even if you have fixed payments, rate fluctuations will have an impact when you need to renew your mortgage. You may have to increase your monthly payments to keep the same amortization period. Or you'll have to refinance your mortgage and extend your amortization to keep your lower payments. 

Variable-rate mortgages are often the best choice 

According to many economic experts, in most cases variable-rate mortgages are more beneficial in the long-term compared to fixed-rate mortgages.  

That being said, keep in mind that the most advantageous option for you will depend on the economic situation, your personal finances and risk tolerance. Like all financial products, each case is unique.  

What’s a hybrid or made-to-measure mortgage? 

A hybrid or made-to-measure mortgage combines both a fixed-rate and variable-rate mortgage into one. The idea is simple: Divide your mortgage into segments. Each of these segments have their own characteristics, including term, interest rate, etc. That way, you’ll be able to get the advantages of a variable-rate mortgage for a part of your loan, and secure another part with the advantages of a fixed-rate mortgage.  

What causes mortgage rates to change? 

Variable mortgages rates 

As mentioned earlier, a variable mortgage rates fluctuates depending on the prime rate of your financial institution. Prime rates vary mainly according to the key interest rate issued by the Bank of Canada. Basically, if the key interest rate increases, so do variable-rate mortgages. 

The key interest rate is adjusted according to the economy and inflation rate. The stronger the Bank of Canada expects inflation and the economy to be in the coming months, the higher the key interest rate will be to curb inflation. 

Beware! Although closely linked to the key interest rate, the prime rate can sometimes fluctuate between periods when the key interest rate changes. For example, the prime rate could increase in anticipation of future increases in the key interest rate. 

Fixed mortgages rates 

Fixed mortgage rates are influenced by long-term Government of Canada bond rates. For example, fixed mortgage rates for a five-year term vary in relation to a five-year Canadian bond rate. Bond rates fluctuate with the stock market, which are influenced by long-term economic and inflationary forecasts. 

What do I do if interest rates decrease? 

If particularly favourable rates are in effect or if an exceptional rate decrease is expected, you could:   

• Switch your variable-rate mortgage to a fixed-rate mortgage. 
  
• Renew your mortgage early and with no penalties, as long as it matures in the following 6 months. 
  

Be careful, if your loan doesn’t mature for a long time, get out your calculator: 

What do I do if interest rates increase? 

As soon as a rate increase is announced, you immediately ask yourself: what impact will it have on my mortgage payments? We get it. An increase can have a (possibly immediate) impact on your payments if you have a variable-rate mortgage or renewal coming up.   

Before making any drastic decisions, here are a few solutions in case interest rates go up: 

• If your monthly payments are already a big part of your expenses and your loan is maxed out, evaluate other areas of your budget that could be optimized. 
  
• If you can afford to do so, build a savings cushion that you can use if there’s an increase.   
  
• Consider converting your variable-rate mortgage to a fixed-rate mortgage. That way, if one or more increases are expected, you can stabilize your rate and monthly payments for easier budgeting. 
  
• If you want to keep a variable rate, consider accelerated repayments in one lump sum or periodic payments when rates are low. This would allow you to adjust your budget now to prepare for possible rate increases. 
  

First-time home buyers: mortgage planning tools 

Now let's move from theory to practice and assess your tolerance for fluctuating monthly payments. Here are some mortgage planning tools to help you predict the costs for a first-time home buyer and develop a realistic annual budget: 

A tip for peace of mind: While looking for a home, you can lock down a good mortgage rate against possible increases with a mortgage pre-approval. It will also help you simplify your buying process by certifying your borrowing capacity, especially when it comes to making an offer to purchase. 

As with any financial product that fluctuates according to the markets, the choice between a fixed or variable rate will depend on the economic context, your budgetary flexibility and, above all, your risk tolerance. Would you like to evaluate your personal situation with an expert? We're here to answer your questions.