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What’s the difference between fixed and variable interest rates?

If you’re in the process of buying a property, you may wonder whether you should get a fixed or variable interest rate on your mortgage.

Both have their potential advantages and disadvantages, so your choice will depend on your financial situation, risk tolerance and the market outlook.

What is a fixed-rate mortgage?

A fixed-interest mortgage means the interest rate on the amount you borrowed remains the same, or fixed, for a set time. Your monthly mortgage repayments will not change, regardless of the interest rate, which can make it easier to manage your expenses and budget. 

You can set the fixed-rate period of your mortgage for up to 5 years. After that, it will automatically become a variable-rate mortgage for the rest of your loan term. 

Explore: Fixed-rate home loan

Pros

  • Predictability – your monthly payments stay the same
  • Protection – you won’t be affected by rising interest rates

Cons

  • Less competitive – fixed interest rates can be higher, especially at the outset
  • Less flexibility – you won’t benefit from a drop in interest rates

What is a variable-rate mortgage?

This is linked to the UAE benchmark interest rate, known as the Emirates Interbank Offered Rate (EIBOR). 

The variable rate is reviewed every 3 months, meaning the interest rate you pay on your home loan can fluctuate. You can pay less if interest rates drop, but more if rates go up. 

Explore: Variable 3-month EIBOR Home Loan

Pros

  • Savings – you benefit if interest rates fall
  • Lower initial rates – variable rates can be lower than fixed rates at the outset

Cons

  • Higher payments – you risk paying more if the EIBOR rate rises
  • Fluctuations – budgeting can be difficult if rates change

Which is better for you?

When deciding between fixed and variable rates for your home loan, think about whether you prefer stability or flexibility with the monthly repayments. And whether potential long-term savings are worth the risk.

A fixed-rate home loan can offer stability and peace of mind, especially if you plan to own the property for a long time.

A variable 3-month home loan can save you money if you’re comfortable with taking on risk and are confident that interest rates may fall or remain stable.

A fixed-rate mortgage can work out costing less if interest rates rise, while a variable-rate mortgage can save you money if rates decline. 

You may also have the option of switching your mortgage from fixed to variable or vice-versa. This can help if you want to get a better interest rate or reduce your monthly repayments. Find out more about how to change your mortgage deal.

Takeaway

There are pros and cons to each mortgage repayment rate, so look closely at your circumstances and goals to weigh up which option is the best fit for you.

It can also help to consult a mortgage broker who can give you independent advice.

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What next?

Explore more

Learn more about how first-time buyer mortgages work, with some tips and guidance on applying for a mortgage.
Everything you need to know about the different types of home loans.
Learn about how to buy a property and how the process works with our guide.
Disclaimer
This article provides general information about mortgages. HSBC UAE may not offer all the products or options mentioned. This article should not be relied upon as financial advice.