- Pros of Fixed-rate Mortgages
- Drawbacks of Fixed-rate Mortgages
- Merits of Variable Rate Mortgages
- Cons of Variable Rate Mortgages
- FAQs
Mortgage is a common term in the homebuying glossary. It is a flexible payment option for many when purchasing a property in the UAE. Among its different types, the most common are fixed-rate vs. variable rate mortgages. These two vary based on the interest rates throughout the repayment period and have certain merits and drawbacks, catering to various scenarios.
For a clear understanding of both, here is a detailed comparison of fixed-rate vs. variable rate mortgages. Let’s get going.
Differences Between Fixed And Variable Mortgages – Essentials To Know
One can find many types of mortgages in Dubai and through the Emirates that facilitate the home-buying process and give greater control over payment methods. As for fixed and variable mortgages, the key difference lies in the stability of interest rates. In addition, determining which type is more suitable also depends on the circumstances.
We can simply compare them:
- Fixed-rate = predictable payments
- Variable rate = Potentially, the initial payments may be lower, but there could be fluctuations in the future.
Below is a comparison of the fixed-rate vs. variable rate mortgages. First, we will go through the details of fixed interest rates.
PROS OF FIXED-RATE MORTGAGES
As the name implies, fixed-rate mortgages offer a fixed interest rate throughout the repayment period. The repayments remain fixed despite the change in interest rates or market fluctuations. In the UAE, the fixed period is up to five years. Here are the merits of fixed-rate mortgages.
Predictable Payments
The main difference between fixed or variable mortgages is that the payment remains constant throughout the period.
For instance, you buy a property in Dubai for AED 1,000,000 and make a down payment of 20%, which amounts to AED 200,000. The remaining AED 800,000 is financed through a fixed-rate mortgage.
With a 5-year fixed interest rate of 4.25%, the monthly mortgage payments will be based on this rate applied to the AED 800,000 loan amount. Throughout this period, the monthly payments will remain the same, providing stability in budgeting.
Peace of Mind Amid Economic Fluctuations
A fixed-rate mortgage offers peace of mind, particularly during economic unpredictability. You can rest assured that the mortgage payment won’t vary due to fluctuating interest rates, contributing to financial security.
Streamlined Budgeting
Fixed monthly payments simplify long-term financial planning. With it, it is easier to integrate mortgage expenses if you live on a budget in Dubai or any other city. It is beneficial for retirement, education and financial goals.
CONS OF FIXED-RATE MORTGAGES
While fixed-rate mortgages offer stability, they also come with some drawbacks such as higher initial interest rates.
Less Flexibility
During a fixed-rate mortgage, if the EIBOR or bank’s interest rates decrease, one can not avail of lower monthly payments. This means missing out on potential savings that could have been gained from a rate drop. Additionally, such rates offer less flexibility for property mortgages in Dubai and Abu Dhabi or other cities, regardless of market conditions.
Higher Reversion Rate
After the fixed-rate period ends, a mortgage usually shifts to a variable rate known as the ‘reversion rate’. This rate is higher than the initial fixed one, resulting in a notable increase in monthly payments.
Let’s move on to the second aspect of fixed-rate vs. variable rate mortgages. Here are the basics of variable rate mortgages.
PROS OF VARIABLE RATE MORTGAGES
Adjustable or variable rate mortgages are another popular home financing option in Dubai and the rest of the Emirates. This type of rate varies throughout the repayment period per the EIBOR rates. (overnight, 1 week, 1 month)
Lower Interest Rates
Variable rate mortgages (VRMs) often start with a lower interest rate compared to fixed-rate mortgages, resulting in lower initial monthly payments. This frees up funds for other expenses or enables you to secure a mortgage in Dubai or anywhere else with a larger amount.
Plus, if overall interest rates drop, your VRM’s rate will also decrease. It helps save money in the long run, especially if you plan to sell your property in Dubai or any other city before a fixed-rate period ends.
Flexibility
VRMs offer flexibility with features like prepayment options to pay off loans faster without penalties. This leads to interest savings and earlier home ownership. Some VRMs also have capped rates, limiting how much interest can increase and protecting against significant payment increases.
Lower Initial Payments
A key difference between fixed rate vs. adjustable rate is lower initial payments. VRMs generally offer lower initial payments and long-term savings with falling interest rates. They also provide other prepayment options and capped rates when deciding on a mortgage structure. It gives homeowners more control over their finances.
Cons of Variable Rate Mortgages
Here are some drawbacks of variable interest rates.
Rise in interest rates
Variable rate mortgages can become more costly if interest rates rise. They cause monthly payments to go up and potentially strain budgets. This uncertainty can be challenging, especially if incomes remain the same or unexpected expenses arise. In such cases, you can turn to Islamic mortgage banks in the UAE, although it is harder to qualify for them.
Less predictability
Unlike fixed-rate mortgages, VRMs make budgeting and long-term planning harder due to fluctuating payments. The unpredictability can cause stress and anxiety for borrowers, as it’s difficult to accurately forecast future expenses.
FAQs
Should I choose a fixed or variable rate mortgage?
The choice between a fixed rate vs an adjustable rate depends on certain factors. These include risk tolerance and stable monthly payments versus potential savings from fluctuating rates.
What is the difference between fixed and variable rates?
Some key differences between fixed and variable mortgages are stability, initial interest rate and flexibility in the repayment term.
What is the disadvantage of a variable mortgage?
A variable mortgage has uncertainty and the potential for increased monthly payments if interest rates rise. It can strain a budget and make homeownership more expensive.
That was a rundown of fixed-rate vs. variable rate mortgages, outlining the difference between two common mortgage types. In short, fixed-rate mortgages offer stable monthly payments throughout the loan term. Meanwhile, variable-rate mortgages have fluctuating payments that change as per market interest rates. It is one of the things to consider before securing a mortgage in Abu Dhabi or any other emirate.
In addition, you can consider other mortgages when buying a house in the UAE. Which type of mortgage you choose depends on your financial situation and your plan in the long run. You can also go through these FAQs on getting a mortgage in Dubai to clear your doubts.
To learn more about property financing options in the UAE, keep reading dubizzle’s real estate blog.
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