A fixed rate mortgage is one where the interest rate on the loan is fixed over the period of the loan (or a set period of time). Here it is compared here with an Adjustable Rate Mortgage (ARM) which is linked to the London Interbank Offered Rate (Libor). LIBOR is a rate that is set as an average of all bank rates. It is one of the indexes used by banks to determine the variable rates they will offer.
Your mortgage loan
Your loan may be split into two options within those already set out. This includes an interest only loan where you do not pay off the capital of the loan within the mortgage period. Instead you are expected to pay it at the end of the mortgage period. Even an interest only mortgage can be split into either an ARM mortgage or a fixed mortgage. They can even vary between the two by changing to ARM once a fixed period comes to an end.
How Libor works
Libor is one of the most significant interest rates set by banks. It is used to calculate interest rates on their various products including mortgage loans. It is established by the disclosure of the rates each bank is willing to lend to other financial institutions. It spans across ten currencies for 15 different loan lengths and loan types. The banks then use these rates to determine the rate they would like to set their products at. The banks are now fully monitored after allegations of manipulation of the Libor rate surfaced some years ago.
Which to choose – fixed or variable?
Your choice may not depend on the monthly payments of your mortgage, but the level of security you want. You should note that fixed rates may give peace of mind in the short term, but they will eventually end. You will eventually need to find another product or move to a variable. ARM rates are currently very low due to the Bank of England rates. Therefore, they seem like a great option, but they can and do move quickly. Our calculator may offer you a way to determine the best mortgage rate option for your needs.
How the loan calculator works
We use a number of factors to determine the best comparison of your mortgage loan options. These include the mortgage amount, the term length and the expected rate. We also include how much that will fluctuate across the term and the interest rate offered. Then you need to add in the number of months that your loan is fixed and any interest rate caps that might be in place. The result will be the amount you can expect to pay monthly and across the entire term of the loan. In the case of interest only ARM, this is only the interest and not the capital.
The calculator comes with two parts: an information section and the report section. You will be asked to input your details with as much accuracy as you can. The calculator will give you various reports that allow you to get an idea of how your mortgage may work for your needs
The mortgage amount refers to the amount you need to borrow – not the value of the home you want to buy. If you have a deposit, your loan amount will be less.
The term is usually around 25 years. However, if you are young, you may be able to stretch this to 30 years or more. Buyers who are wanting to pay off their mortgage before retirement may have to adjust their term downward to satisfy the lender.
The expected rate of change refers to how much your variable rate may increase or decrease. This can be difficult to tell, but most mortgage rates don’t change by more than a quarter of a percent within one year.
To compare a fixed mortgage with a LIBOR ARM mortgage you need to input the interest rates of both. The former is easier, as the LIBOR will change regularly. Just use the current rate at the time of your calculation.
There will often be an interest rate cap on a variable mortgage. If yours has this, you should include it to get a clear picture of the upper limit of your mortgage.
Finally, add the amount that you will be prepaying towards the principle for the interest only mortgage.
You have a choice to see your report based on monthly figures or annual. In this case, we are showing the monthly payments. With the fixed rate mortgage shown in green and the LIBOR shown in blue. As you can see the LIBOR is cheaper based on the information given. This might not always be the case.
The second report is the Payment Schedule. This gives a breakdown of the fees and how they may change month to month based on the rate of change. The balance of the mortgage will reduce with a fixed rate mortgage, but the principle stays the same with the interest only option. You will need to save for the principle elsewhere.
The Results Summary details the repayments in the first year and at the end of the term. This allows you to compare the mortgage types across a longer period. You can quickly see how much interest you will pay on each mortgage.
For a more detailed comparison, you can choose the LIBOR vs. Fixed Rate tab. Here you can see a breakdown of each loan type and discover exactly how each option will compare for your purposes.
Once you have all of this information, you will be able to make a more informed choice about your mortgage requirements. You can decide whether you should choose a fixed rate or a variable. Alternatively, see an interest only mortgage option for repayment. A mortgage broker will also be able to help you with this decision. An expert should always be consulted before you sign a financial contract with your lender.
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