The trend is unchanging. The people prefer to borrow with a fixed rate rather than a variable rate. In 2014, only 5% of borrowers chose a variable rate for their mortgage.
Why choose a variable rate?
Signing a variable rate mortgage means having the possibility of borrowing at lower rates than with a fixed rate loan. It is also the hope of seeing the market fall in order to benefit from a reduction in the overall cost of its loan, either by reducing its duration, or by reducing its monthly payments, or even by combining these two elements. But this is a gamble that has its downside: if the rates rise, your monthly payments follow the same movement. Another interest, in the event of resale the variable rate credit makes it possible to negotiate the absence of compensation for early repayment. This is why we recommends reserving variable rate loans:
- short-term loans, for example to people who intend to resell their property in the short or medium term
- to people who can support a possible increase in their monthly payments in their budget
- to investors
What to do if rates rise?
It is always possible to transform a variable rate into a fixed rate, provided that your contract provides for this freedom. But you have to be careful: this passage is irreversible and it also generates costs. There is also an even more radical solution in the event of a sharp rise in rates. This involves buying back your credit by obtaining a new fixed-rate loan from another financial institution to settle the first one. Again, be careful with prepayment charges. Hence the importance of negotiating the absence of a penalty when signing the variable rate offer.
Secure your variable rate loan
Different tips can limit the risks inherent in a variable rate loan. Thus, it is recommended to take out a loan with an option which will allow you to change for a fixed rate at the time of the anniversary date of the contract, that is to say every year. Capped rate loans are another alternative. By regulating the increases and decreases in the rate, within limits determined beforehand in a contractual manner, this type of loan thus limits your financial risk.
If you plan to opt for a variable rate credit, we offer you its advice to assess according to your profile, your project and market trends, if your choice is the right one.