Access to a home implies, in most cases, requesting a mortgage loan. There are essentially two types of mortgages: fixed and variable. For this reason, it is important to think carefully about which option is the most convenient and the one that best suits what one is looking for.
A fixed mortgage (also known as a fixed rate) is one that maintains the same interest rate throughout the life of the loan, which means that the monthly installments to pay, to repay it, are always the same (without increases or decreases caused by due to market fluctuations). In contrast, a variable mortgage (also known as a variable rate) is one in which the amount of the monthly installments varies according to a reference index (most commonly, this index is the Euribor). The interest rate applied to the mortgage is made up of the value of the Euribor plus a fixed differential.
Three factors determine the advantages and disadvantages of these two types of mortgages: the interest rate, the term, and the installment.
Type of interest
The interest rate is different in a fixed mortgage and in a variable one. In the fixed rate, the interest rate will remain unchanged throughout the life of the loan: the installment to be paid is always the same, it neither goes up nor goes down, so the client knows it in advance. In a variable, the interest rate is made up of a fixed differential plus a reference index (usually the Euribor). In this way, and unlike what happens when choosing a fixed mortgage, the installment to pay may go up or down depending on how the reference index does.
The repayment period is usually different depending on the type of mortgage: shorter in fixed-rate mortgages and longer in variable ones.
Another factor to assess, when choosing between a fixed or variable mortgage, is what will be paid each month.
In a fixed mortgage: the terms granted to pay the mortgage are usually shorter, so the possibility of paying lower installments is limited. On the other hand, once the term is set, the fee to be paid will remain unchanged, neither going up nor going down. In a variable mortgage: a longer term is usually offered for the mortgage payment, which opens the possibility of paying lower installments. Likewise, once the term has been set, the amount of the fee may vary according to the reference index (Euribor). The most common is that, every 6 or 12 months, the interest rate of the mortgage is updated taking into account the value of the Euribor.
The Euribor is decisive when choosing a mortgage: currently, the 12-month Euribor is still out of control and closed in July at 4.15%; the highest value since November 2008. Due to this important increase, the installments of variable-rate mortgages that will be revised soon will experience a significant increase in cost. According to various estimates, the average increase in mortgages will be around 300 euros per month (more than 3,500 euros per year), although it could be higher depending on the conditions of the updated loan.
What is more convenient
Is it better to pay less in the short term with a variable rate and risk the Euribor continuing its rise? Or is it more convenient to pay a little more with a fixed interest and ensure a stable payment forever? It will depend on your preferences and your risk tolerance:
A fixed mortgage is better if you want to always pay the same amount and you don’t mind that your payment is a little more expensive during the first months or years. A variable mortgage is better if you want to pay little in the short term and you do not mind that your payment changes, as long as you can assume a possible increase in payments.
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