We all know that the mortgage market all around the world is not in the best of shape right now. However, it isn’t actually totally frozen. There are still people applying and being accepted for mortgages in Australia and the rest of the world. And, as always, they have been given two mortgage options to choose from. One is the variable rate mortgage and the other is the fixed mortgage rate.

A fixed mortgage rate is a home loan where the interest rate and monthly payment stay the same for the life of the fixed interest term. That means your payment of $600 per month is going to be $600 per month at the end of the loan. But the variable rate mortgage is completely different.

The variable rate mortgage

The variable rate mortgage is the type of mortgage where the rate will change throughout the life of the loan. Actually, it will increase.

This is the kind of loan people take out because they want to avoid the higher payment that a fixed mortgage often has at the beginning. The low payment at the start is attractive because they believe they can pay a higher rate down the track, counting on pay rises etc.

Some blame the variable rate mortgage for the mortgage situation throughout the world. Individuals took out variable rate mortgages and were not able to make the payments when the rates increased. Although this may be true for some, it is not true for all. There are plenty of people who were still able to fully pay off their variable rate mortgages. The trick, however, is making sure that you are able to handle the increased payment. If you are able to handle the larger amount, you can avoid a large balloon payment at the end of the loan. This is normally something that is part of a fixed rate mortgage. A balloon payment is a lump sum payment at the end of the loan and some individuals simply refinance that part of the loan or they may refinance the entire home. A variable rate mortgage can help you minimize the impact of a balloon payment.

So how do you know if you can handle it?

Well, just think of how much you may be able to afford now. Could you nearly afford to have a fixed rate mortgage? If so, then there may be a chance that you will be fine if and when the interest rate increases. However, it is hard to tell what is going to happen in the future. The only thing that is certain is that the future is uncertain. But if you keep control of your expenditure, you will be fine. This means you must fully understand your loan. This means you need to know when the interest rate is likely to increase so that you can be prepared. When you are prepared, you can cut corners where you need to cut corners and you can ensure that your income flow is what you need it to be when the time comes.

Should you do it?

Whether or not you choose a variable rate mortgage is entirely up to you. No one can tell you otherwise. Just make sure that you understand everything there is to understand about the loan. It is normally those that do not understand or fully appreciate the loans that cannot make the most of them, but those who do are able to manage any changes that occur over time.

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