Pros and Cons of Flexible Rate Mortgages

08-Aug-2007

Fixed rate mortgage versus variable rate mortgage? 

As the name suggests, a fixed rate mortgage is a type of mortgage where you agree to pay a fixed interest rate each month over a specified period. This is one of the most popular types of home loan payment options since you can feel secure in the fact that your monthly interest rate will not change through the course of the loan term. However, aside from a fixed rate mortgage, there is also the flexible rate mortgage where the borrower is given more leeway when it comes to the amount of payment to be made for the monthly premiums.  With this mortgage option, you can pay more or less than the agreed monthly premium, and the amount of flexibility you have in either direction will depend on your current financial status. With a flexible rate mortgage, a loan can be paid off in advance by making 'overpayments', thereby saving the borrower a significant amount of money in interest rates. When considering fixed vs. variable rate mortgages, the deciding factor should be your financial priorities; does financial stability matter more to you than the possibility of saving money each month when the base rate falls?

What are the advantages of flexible rate mortgages?   Overpayment: With a flexible rate mortgage, a borrower can pay more than the required monthly premium without paying a penalty or an additional charge. This is especially helpful for those who are working on commission or those who do not have a fixed monthly income. If you have the extra cash, you can make an overpayment which will be credited against your loan amount. This way, if you make a lot of overpayments, you will eventually save a significant amount on interest costs and the total amount of debt will be easily reduced.

Payment reduction or underpayment: Borrowers who are not earning a fixed amount every month or those who are temporarily out of work can benefit from a payment reduction or underpayment for flexible rate mortgages. With a flexible rate mortgage, you will be allowed to pay only a minimum amount against the monthly premium. The obvious downside of this is that it will take you longer to clear your mortgage balance, however the benefit of flexibility during temporay financial difficulty will outweigh this.

Payment holiday: If you have accrued several overpayments over a continuous period and you suddenly experience cash shortage, you can use these overpayments to cover a month or two of payment holiday, where you do not need to make any payments at all. The good thing about flexible rate mortgages is that you are not required to pay any penalties in the case of making an underpayment.

Borrowing of funds against the amount of the mortgage loan that you have repaid or against any overpayments. 

What are the disadvantages of flexible rate mortgages?    If there are several months where you are only paying the minimum amount, your loan period may be extended. This can also lead to your interest rates increasing to potentially unmanageable levels so you need to be careful when making payments for the minimum amount only. You should only make underpayments or skip payments for your mortgage in case of financial emergencies. Or, you can build up on the months where you are earning extra cash and make as much of an overpayment as you can so that this will be your antidote for the financially unstable months.

If you decide that a flexible rate mortgage is the best mortgage option for you, take a moment to fill out our short flexible rate mortgage form. Once you've done so, we will introduce you to a flexible rate mortgage broker. This broker will answer any questions you have about flexible rate mortgages, and they will search the market to find the best flexible rate mortgage for you and your particular financial circumstances.