title. i understand the difference between variable and fixed as definitions however with loans, ‘variable’ doesn’t quite register to me..
why on earth would someone consider that type of loan with a purchase of let’s say, a house?
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1. The interest rate is usually lower than that of a fixed rate loan/mortgage BECAUSE the rate can move up or down.
2. People choose them for that reason, and because the economic situation is relatively stable, so the expectation is that movement will be flat or downward.
3. The risk, as we are seeing now, is that the economy enters a sudden inflationary cycle, and the borrower either cannot “lock in” a fixed rate, or they do not do so quickly enough.
#s 1 & 2 favour the borrower, and that is why they take advantage of the option.
#3 is where “speculators” get into trouble and end up unable to make payments on their debts.
It’s all about how comfortable you are with risk. Until very recently, the variable rate mortgage fans were doing alright. But the last year or so has bitten many in the financial ass, and they will struggle to keep up, having taken on too much debt to be able to keep paying when interest rates move higher. That is why, in Canada, borrowers are required to pass a “stress test” which measures their ability to pay in the event of rate increases.
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