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Differentiate between the mortgage interest rates below - Leaving Cert Home Economics - Question 11 - 2020
Question 11
Differentiate between the mortgage interest rates below. (i) Fixed rate (ii) Variable rate
Worked Solution & Example Answer:Differentiate between the mortgage interest rates below - Leaving Cert Home Economics - Question 11 - 2020
Step 1
(i) Fixed rate
Answer
A fixed rate mortgage includes the following characteristics:
- Monthly repayments are set for a predetermined period, which means they will not change during that time.
- As a result, borrowers can plan their finances better, since their repayment amount remains constant.
- Fixed rates are generally available for various terms, such as 15, 20, or 30 years.
Step 2
(ii) Variable rate
Answer
A variable rate mortgage has the following features:
- The interest rate can fluctuate over time, typically aligned with market interest rates.
- Monthly repayments can thus increase or decrease, affecting the overall repayment amount throughout the mortgage term.
- This type may also include specific rates like:
- Loan-to-Value Rate: This is based on the ratio of the mortgage amount to the property's value.
- Tracker Rate: These rates follow the European Central Bank (ECB) rate at a set margin, meaning if the ECB rate rises or falls, so does the mortgage rate.