Flat vs. Variable Finance Rates

Accountancy Resources

Flat vs. Variable Finance Rates


My husband and I plan to buy a house in the next few months and I would like to know the difference between flat vs. variable finance rates.

Choosing between flat vs variable finance rates can be a crucial part of any major purchase such as a house or an automobile. Prevailing interest rates and the direction expected during the term of the loan are the most important factors to consider if given a choice between which type of loan would be best.

Typically, a flat rate is a set interest rate charged for a loan over a specified period of time with the interest paid in the monthly mortgage payments.

Flat rates don’t vary regardless of the interest rate environment. This type of rate is preferred in times of rising interest rates because the borrower fixes their cost and maintains mortgage payments at the same level throughout the life of the loan.

A variable rate, on the other hand, will change with the prevailing interest rate environment. If rates rise, this is reflected in the variable finance rate. Variable rates can be preferable in times of low-interest rates; nevertheless, having a variable loan outstanding if rates begin to rise, might not be a pleasant experience for the borrower.

Many people opt for a flat over a variable-rate to lock themselves into a payment plan at fixed prices and with fixed costs. This allows for easier bookkeeping and can be more easily managed; it also provides a sense of security that the rate won’t change regardless of the interest rate environment.

Nevertheless, a variable rate loan in a downward trending interest rate environment might make more economic sense and could save the borrower a considerable amount of money if the trend continues over a large portion of the loan term.