Home Loan Details

An Adjustable Rate Mortgage means that your interest rate fluctuates. It will have a fixed payment for a certain amount of time and once the rate adjusts, your payments will change. Fixed rate loans give you a consistent rate throughout.

This article outlines the disadvantages of adjustable rate mortgages for home buyers.

Lower Initial Payments

1. Lower Interest Rate

As well as having a lower interest rate to start with, adjustable rate mortgages can actually be cheaper for the initial period. Usually you won’t have any changes for between 5-10 years. This can mean that your monthly payments will be lower. If you are looking to move or remortgage before the rate changes this can be a perfect option.

2. Save Money

Once the fixed period has ended and rates drop you can save money on your monthly payments. You won’t need to remortgage to save money as your rate will be lower. This can save you a lot of money over the years. As borrowing costs are lower, adjustable rate mortgages can offer better terms.

3. Cheaper for short term

If you are looking to move homes in the near future adjustable rate mortgages can be a good choice. As they have a lower initial cost your monthly payments will be cheaper to start with. This gives you flexibility with your budget. After a while the rate will change however if you are looking to move before this happens it will still work for you.

4. Large Loans

Many people choose adjustable rate mortgages as they can seem cheaper at the start. During periods of high house price growth this can allow you to get onto the property ladder. Some areas have high fixed rates so people will opt for adjustable rate mortgages. Having a lower initial cost means you can get onto the ladder.

5. Flexibility

Having an adjustable rate means that if your income increases in the future you have flexibility. As you have a lower initial rate it will be easier to manage your cash flow. This can make your budget feel less tight.

Increasing Payments

1. Uncertain Rates

Adjustable rate mortgages can increase your monthly payments. Once you leave the fixed period your rate will adjust depending on the index and margin of your loan. This can mean that as general rates go up so will your payments. Your budget can feel squeezed.

2. Confusing

Many people can get confused with adjustable rate mortgages. They are more complicated than fixed rate mortgages. You can easily get confused. It’s important to understand what you’re getting. There are many factors to consider such as rate increase caps and how often your rate will be recalculated.

3. Remortgaging issues

Most people will want to get a fixed rate to avoid the increasing adjustable rates. However your credit rating, house value and market can all affect this. If you have a poor rating in any of these areas you may not be able to get the loan at all or you may get less favourable terms.

4. Negative Amortization

Some adjustable rate loans can increase rather than decrease. If your initial payments are too low or you’ve chosen a loan with limited payments you’ll start to owe more. If your payments aren’t enough to cover the full cost you’ll start to owe more. This will mean you’ll have larger payments in the future.

5. Stress

An increasing rate can take some people by surprise. Increasing payments quickly can cause stress and put pressure on your budget. Many people feel pressure build up. You’ll need to prepare yourself for larger payments. Rarely will sudden increases help you stay calm with your budget.

Factors to Consider

1. Financial Situation

Take a good look at your finances. Will you be able to afford increased payments? Having savings will help. Will you be able to afford higher payments? Will you be able to balance your budget with an increasing interest rate?

2. Understand the Loan

Take note of the loan. How much can the rate increase? When will it increase? How long is the fixed initial period? What is the calculation? This can help you understand what will happen in the future.

3. Future Planning

Most people will plan for the future. If you’re looking to move in the near future this may be a great option. If you’re staying in for a while this can change quickly. Whilst the rate can help initially it may take you by surprise. The most important factor to consider is whether you want peace of mind with lower payments or potential increases. Everyone has a different journey.

4. Fixed rate mortgages

Adjustable rate mortgages can be viewed differently to fixed rate mortgages. Fixed rates can give you more peace of mind. Whilst they can be more expensive initially they can be better suited for certain lifestyles. There will be times where you’ll need peace of mind.

Some loans with adjustable rates can start cheaper, however can be more expensive in the future. Take a good look at your income to see how stable it is. Taking a good look at the small print will help you understand what will happen. Take a look at your future plans. Often having a conversation with someone who knows a lot about these loans can help give you a good insight.