Home Loan Basics: Variable Rates

Not just the options themselves, but a person also needs to be aware of the options available within options. Take a loan like a mortgage as an example. There are so many different kinds of mortgages available nowadays that it would seriously take a book to discuss them all in detail but one aspect can and will be discussed over the course of this article. That aspect is the one of variable interest rates.

Philosophy

Within any market there is always going to be a fair amount of variation and it is that variation that serves to create the risk. It is impossible for everyone to make money in a market and unfortunately for some to win others have to lose. This is the basis of our economy and there is no reason why the home loan game would be any different. A savvy consumer senses when the risk is low and the reward is high and pounces on that as an opportunity to allow themselves to save some money. It really depends on the fortitude you have and the tolerance level you possess for dealing with risk but if you are willing to take the gamble then the variable rate scheme might just be for you.

Variable rates, as the name implies, are loans that are granted with interest rates that fluctuate over time. If the market is strong and the banks are all making lots of money then your interest rates will be lower and likewise if the market is bad then your interest rates will be higher. It is a very interesting way of doing business and since the banks will adjust the interest rates based on their optimal returns it doesn’t really affect them whether you decide to go for a variable rate or not. It really depends on you and whether you are willing to take the risk of doing so.

Usage

Variable interest rates are not the normal way of doing business and usually when one deviates from the norm they need to have a really good reason for doing so. This is no different with variable interest rates and for that reason there is really only one good time to use them.

People will use a variable interest rate when they suspect that the market is going to fluctuate in a way that will drive the prices down. Short term lower rates are more important than higher long term rates because your balance is larger in the short term than it will be after you’ve already made payments on it. There is a critical value here and this will require some calculation on your part to figure out where it is.

Article correct at its author date: April 2007. Copyright Virtual Office Space, Any unauthorised reproduction of this article will be prosecuted to the full extent of the law. Credit Cards Australia.

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