Why Your Adjustable Rate Mortgage Could Be A Massive Money Saving Mistake

What is an adjustable rate mortgage?

An adjustable rate mortgage is a home loan where the interest rate for the loan can fluctuate. This means that the monthly payments that you have to make can go up or down.

What are the advantages and disadvantages of an adjustable rate mortgage?

Typically when you enter into an adjustable rate mortgage the interest rate and monthly payments will be fixed for a certain period of time. Once that period has expired (usually 5 years) your mortgage payments could go up or down. Clearly if they go down it’s advantageous but they can go up too and your monthly payment may end up being far higher than you were paying during the initial period.

Why would I even consider an adjustable rate mortgage?

For the initial 5 year period with an adjustable rate mortgage the monthly payments can be lower than they are for a fixed rate mortgage. That can be very attractive to people looking to keep their monthly payments low. People who are not planning on staying in the home they are purchasing for longer than 5 years often take out adjustable rate mortgages to help them get established in the property market.

Are there any caps on adjustable rate mortgage payments?

Even though the interest rate will track against the market index and rises in interest rates are regulated by our government there are caps. There is for example a limit on how much the interest rate can increase by from year one to year two. It’s important to understand these caps before you enter into an adjustable rate mortgage, and we recommend that you consider what your repayments might look like if interest rates were sky high. If you can still make your monthly mortgage repayments when interest rates are at 15% then you are probably OK to consider an adjustable rate mortgage, but if even a 2% increase in interest rates were to make your monthly repayments unaffordable then take a fixed rate mortgage.