Fixed Rate Vs Variable Rate Mortgage: Which is Better?
The Dubai property market has never been more accessible for expats, and if you’re looking to purchase your own home, there are plenty of ways to make the buying process work in your favour. One of the key steps in doing this is by choosing either a fixed rate or variable mortgage.
When it comes to a fixed rate vs variable rate mortgage, there’s no right or wrong answer to which is best. The only real way to decide which is one is right for you is by taking a thorough look at your current situation and comparing the pros and cons of each option.
In this blog we will explain what fixed and variable mortgages are, while highlighting the positives and negatives of each product.
What is a Fixed Rate Mortgage?
A fixed rate mortgage is where the rate of interest you pay stays the same for a specific amount of time. In Dubai, this time period is usually between one and five years.
As an example, if you were to purchase a property that costs AED 1 million with a down payment of AED 250,000 (25% of the property price), you could fix your mortgage rate for five years at 3.45%.
For a 25 year mortgage of AED 750,000 (75% of the property price), that would mean your monthly repayments would be AED 3735 for the first five years. Once the five years are over, you will be moved onto a reversion rate (also known as a follow-on rate), which is usually higher.
What are the Advantages of a Fixed Rate Mortgage?
There are many advantages to having your interest rate locked in. These pros include:
- Your rate will not increase: A fixed rate mortgage means exactly that; it is fixed in place. Even if the bank’s interest rates were to rise, your monthly payments will not rise with them, meaning you do not have to worry about monthly payments going up.
- You can organise your budget: One of the most positive aspects of a fixed rate mortgage is that you know exactly how much money you have to pay each month. This means you can set aside that amount every month confidently knowing that it will cover your payments. You can then organise your other outgoings based around this set cost.
- You only need a short mortgage: As mentioned earlier, you will be moved onto a reversion rate once your fixed period ends. A reversion rate is usually higher than a fixed one, so if you’re only after a short-term mortgage, you won’t have to pay the higher interest rate for too long.
What are the Disadvantages of a Fixed Rate Mortgage?
Depending on your circumstances, a fixed rate mortgage might not be for you. Here are the downsides:
- Your rate will not decrease: While an advantage is that your rate won’t increase, there is no opportunity for it to decrease either. If the rate which banks lend to each other falls, anyone with a fixed rate mortgage will still have to pay the agreed fixed amount.
- The reversion rate: A reversion rate can be high. Even if you manage to secure a low fixed rate mortgage, you may be surprised to see how much your monthly payments rise once the fixed period comes to an end. If you become used to budgeting around your mortgage payments, the end of a fixed rate could make it difficult to stick within your parameters.
What is a Variable Mortgage Rate?
A variable rate mortgage is one that can change on a regular basis. Whether the rate goes up or down depends on the EIBOR — the Emirates Interbank Offered Rate. This is the rate that banks lend to each other, plus a fixed percentage added by your personal lender.
This rate changes daily, so for the most accurate data, you should consult the Central Bank of the UAE’s website.
What are the Advantages of a Variable Rate Mortgage?
A variable rate mortgage can work in your favour for many reasons such as:
- Your rate can drop: The main advantage to a variable rate mortgage is that your payments can decrease. This means over the lifetime of your mortgage, you could actually pay less than what you initially thought you would.
- You want a medium or long-term mortgage: A fixed rate mortgage can come with a heavy price once the term ends in the form of a reversion rate. This is something you avoid when you take out a variable mortgage. If you take out a long mortgage on a variable rate, your payments could decrease or only rise slightly over the course of the mortgage.
What are the Disadvantages of a Variable Rate Mortgage?
There are reasons why expats don’t opt for a variable rate mortgage when looking for a property in Dubai. These include:
- Your rate could rise: The flipside to having a variable rate mortgage is that your payments also have an opportunity to increase. While you might only have to pay AED 3000 one month, the next you could be paying in excess of AED 5000 or potentially even more.
- There’s no predictability: If you strongly believe in sticking to a budget, a variable rate can make this very difficult. You won’t be able to accurately predict how much you need to set aside each month to make your payments, meaning you may have to make cuts somewhere else.
Fixed Rate Vs Variable Rate Mortgage: Which is Better?
In the epic battle between a fixed rate vs variable rate mortgage, there will never be a clear winner, as there are too many factors involved to determine which is best. When deciding on a mortgage payment structure, lenders look at:
- The value of your property
- How much you’re looking to borrow / your deposit
- Your employment status and salary
- Your regular spending habits
- Your credit rating
- If you have any existing debt
All these aspects will influence your choice, and to find out which is right for you, it’s best to seek the advice of an independent mortgage broker. A bank may sell you a mortgage that works best for them, but a broker works towards your interests, ensuring you make the right decision.
If you’re an expat struggling to pick a side in the fixed rate vs variable rate mortgage saga, Expat Mortgage is here to give you all the advice you need. Get in touch with us today for more information.