The following is a guest post from Nigerian real estate developer Michael Chudi Ejekam.
The cost effectiveness of most mortgage deals is dependent on market interest rates. Those that currently have a variable rate deal may be wondering when or if it will be better to switch to a fixed interest option. Homeowners coming to the end of a deal and those looking to switch to try and save money may want to consider the pros and cons of fixed or variable mortgage products.
How Market Conditions and Interest Rates Affect Variable and Fixed Mortgages
Each type of mortgage deal comes with a potential cost benefit. But, this benefit is not guaranteed. Choosing the right deals at the right time could save homeowners money. Making the wrong decision could see them paying more than they technically need to.
For example, variable rate mortgage deals give the best cost benefits when interest rates are dropping or are at a low point. These products will have repayments that rise or fall depending on market conditions. In a decreasing or low rate scenario, payments go down. As soon as interest rates start to go up, then this kind of deal becomes more expensive.
Fixed rate deals work in a different way. Here, the homeowner is given a guaranteed fixed repayment for a period of time and market conditions have no effect. So, if interest rates go up, then the mortgage holder will potentially be saving money as their repayments will not rise. But, if rates drop significantly, then they could be paying more than if they had a variable product.
When is the Best Time to Switch From a Variable to a Fixed Rate Mortgage?
Although it is possible to anticipate what might happen to market interest rates, it may not be possible to guarantee accuracy. Some consumers will look to fix a deal when rates look likely to rise. This may work if they are particularly low (i.e. there is nowhere to go but up) or if market conditions make interest rate increases likely.
The best time to switch to a fixed rate deal from a variable product will happen at a point where switching saves people money (i.e. when their fixed rate payment is less than their variable payment would be). It can, however, be hard to get the timing exactly right.
Some that move early may end up paying more on a fixed rate deal ahead of market rises actually taking place. Those that move later when rates start to rise may find that the costs of their fix are not as good as they were in the past.