The interest rate applied to your loan determines the amount you will have to pay the lender in the form of interest, in addition to the capital borrowed.
You have the choice between two types of interest: the fixed rate or the variable rate.
A fixed rate loan.
This rate, established when the loan is taken out, will apply throughout the duration of your loan. A fixed rate can be a reasonable choice when rates are low. It offers you significant security because you know in advance the amount of your monthly payments for the entire duration of the loan.
A variable rate loan.
With a variable rate, the base rate fixed at the subscription of the loan is adapted according to the evolution of a reference index which is linked to market interest rates. The interest rate may be adjusted, both upwards and downwards, several times over the duration of your loan.
Depending on the formula you chose, every year, every three years, or every five years.
Riskier is choosing a variable rate: If it goes up, you'll have to pay more every month. However, it has the benefit of being less expensive than a fixed rate when obtaining credit.
Comparative table.
Advantages...
FIXED RATE....
When rates are low, the fixed rate can be a good financial choice since if interest rates rise, your mortgage credit is not affected.
FLOATING RATE....
Variable rate loans benefit from a more advantageous interest rate at the start of repayment than fixed rate loans. In the event of a drop in market rates, your monthly payment may be revised downwards. This is the reason why this formula is mainly chosen when the rates are high, with the hope of seeing them fall during the repayment of your credit. The law provides that the variable rate must be able to vary both upwards and downwards. But it can at most double. Example: a rate of 2% will be limited to 4%. On the downside, it may go down to 0%.
Some companies offer variable rates with a “cap”. A cap is a maximum limit, different from the general rule. For example, a cap +2 means that for a rate of 4%, the maximum rate that could be applied upwards during a variation is 6%.
Disadvantages..
FIXED RATE...
If you took out a fixed rate when rates were high, you'll be locked into that high rate even if market rates go down. However, you can remedy this by making an early repayment and a new loan (refinancing) at a more advantageous rate.
FLOATING RATE....
If market interest rates go up, it will affect your credit when your rate is revised. You will have to repay larger monthly payments. However, the increase is limited by law.
