Plummeting Interest Rates: Should You Go with Fixed or Variable Interest?

Do you find yourself confused when deciding on the interest rate type on loans? Selecting a loan plan is one thing - choosing the type of interest rate is a task in itself and can be an overwhelming one, especially when interest rates in the market are in a state of flux. 

When interest rates fluctuate in the market, it becomes crucial to consider your options regarding the type of interest rate on your loans or mortgages - fixed and variable interest rates are the two key components here. 

With the current market situation in the UAE seemingly pointing to low interest rates, it leads to the question of which type of rate is the best option for you. This, as you may guess, all comes down to your financial profile, preference, and the current market climate. 

Let’s see which option you should go for in the current scenario after covering a few basics first.  

What is a Fixed Interest Rate?

A fixed interest rate is a predetermined rate of return that you, as a borrower, agree to pay to a lender, generally as a proportion of the amount of the loan. This rate is fixed for the entire duration of the loan. Generally, the fixed interest rate is determined by market forces and is affected by changes in the supply and demand of credit in the UAE economy. 

In the Emirates, the fixed interest rate is primarily influenced by the Central Bank of the UAE and other factors such as the amount of risk associated with the underlying assets or borrowers, the creditworthiness of the borrower, the inflation rate, and more. 

What is a Variable Interest Rate?

As the name suggests, a variable interest rate can vary over the lifetime of the loan depending on market conditions and other aspects. This type of interest rate is typically tied to a benchmark rate such as the Emirates Interbank Offered Rate (EIBOR). If EIBOR rises or falls, the interest rate on loan will also rise or fall accordingly. 

Variable interest rate loans can offer you a degree of flexibility and potentially lower borrowing costs in times of low interest rates. However, they also carry an element of risk, as you must be able to make the payments if interest rates rise. 

Fixed v/s Floating Interest Rate: Which is Better When Interest Rates are Slowing Down?

Floating interest rates are generally advantageous when interest rates are decreasing in the market as they are more flexible and can adjust to the current market conditions on the low side. 

As the market interest rate declines, borrowers with variable interest rate loans may enjoy the flexibility to reduce their loan payments. This is a great benefit to those who wish to maintain a certain budget or wish to save money in the long run. For instance, if a borrower needs to pay off their loan sooner than expected, they can do so without having to worry about any additional fees or penalties. All in all, a variable interest rate loan can be beneficial if you believe that the interest rates are going down and will keep doing so for the near future. 

Are There Any Risks Associated with Floating Interest Rates?

Besides the benefits above, you should also note that variable interest rates can be a high-risk, high-reward option for borrowers, as they are subject to frequent changes that can result in significantly higher or lower payments. If you opt for variable interest rates, you must be prepared to handle the scenario where the payments increase significantly. Additionally, you should know that depending on the nature of the loan, variable interest rates can reset at regular intervals, allowing for further changes in the total cost of the loan. 

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