What are the pros and cons of a mortgage with a fixed rate versus a variable rate?

Fixed interest rate:

Advantages:

• Stable monthly payments: Your monthly mortgage payments remain the same throughout the fixed-rate period, providing predictability and financial security.

• Protection against rising interest rates: If market interest rates rise, your interest rate will not change, which protects you from higher costs.

Disadvantages:

• Less flexible: You will not benefit from any drop in interest rates during the fixed-rate period.

• Higher interest rates: In general, fixed interest rates are higher than variable interest rates because you're paying for the security of stable monthly payments.

• Penalty interest for early repayment or moving: If you want to make additional payments or refinance your mortgage during the fixed-rate period, the bank may charge a prepayment penalty.

Variable interest rate:

Advantages:

• Lower startup costs: Variable interest rates are generally lower than fixed interest rates, which can result in lower monthly payments at the start.

• Flexibility: If interest rates fall, your monthly payments will immediately reflect this decrease.

• Lower penalty interest: In the event of early repayment or a move, the costs are often lower or nonexistent.

Disadvantages:

• Uncertainty: Your monthly payments may increase if interest rates rise, which carries the risk of higher monthly payments.

• Financial planning: It's harder to plan your monthly budget because your expenses can vary.

• Higher costs when interest rates rise: If interest rates rise significantly, your monthly payments could put an unexpected strain on your finances.

• Lower maximum borrowing capacity: With a variable interest rate, a higher (notional) interest rate is used in the calculation, which may mean you can borrow less, especially with a variable interest rate.