Interest rates that fluctuate over time based on changes in an underlying index or benchmark, such as the prime rate or LIBOR. These rates can go up or down, affecting the amount of interest paid on loans or earned on investments. They are influenced by economic conditions, central bank policies, and market demand, impacting both borrowers and investors.
Budgeting Challenges
Variable mortgages are typically linked to a benchmark rate, and the interest rate on the mortgage will rise or fall in line with changes to the benchmark rate, making it harder to budget for monthly expenses.
Interest Rate Impact
If interest rates decrease, a borrower’s monthly mortgage payment will also decrease, providing some financial relief, but if interest rates increase, the borrower’s monthly payment will also increase, which can be challenging.
Saving on Interest Payments
Variable mortgages can have lower interest rates than fixed-rate mortgages, depending on financial market condition but always check with your adviser as this could be reversed.
Navigating Risks
Risks associated with a variable mortgage include difficulty budgeting for monthly expenses due to fluctuating interest rates and the possibility of unaffordable monthly payments if rates rise significantly.
Suitability Considerations
Variable mortgages may not be suitable for those who need a fixed monthly payment, such as those on a fixed income or with strict monthly budgets.