When you are preparing to buy a house and decide to do it through a mortgage, one of the first questions that are asked at the time of stipulation is if we want a fixed or variable rate mortgage . For this reason it is good to get prepared for the fateful question, especially if you buy the first house.
Fixed or variable rate: differences and characteristics
In the moment in which the contract is fixed there are some parameters that must be selected, one of which is the interest rate that can be fixed or variable. The variable rate mortgage is related to the EURIBOR and has a value that usually fluctuates from 1 to 3 months and can fall or rise according to the economic and financial situation . In fixed-rate contracts, the amount decided for the installment depends on the benchmarks of Euribor or the European Central Bank. When we choose a fixed rate we are sure that the installment will be the same for the duration of the loan agreement, but the negative is not able to exploit the reductions in the market that would bring the installment to fall . This type of loan is appropriate for those who fear the trend of the market and want to be sure of the amount to be paid month by month.
The variable rate mortgage, on the other hand, follows the market trend and can therefore fall or rise. If in this case it is advantageous if the financial system allows for a drop, however, it is not possible to predict the installment that you are going to pay and which could also change a lot of month by month . There is also a further type, less known, which is that of the fixed rate or the possibility of moving from fixed to variable rate and vice versa at the end of a given period.
Which rate should be stipulated at the time of signing the loan?
Obviously it is not possible to determine in a univocal sense if it is convenient to stipulate a fixed or variable rate mortgage, this because the choice depends on many factors. If the fixed rate is a higher guarantee, on the other hand the variable rate could be a good opportunity for savings . Obviously the fixed rate payment is ideal for those with a family and wants a certain stability, for those who need to know exactly the mortgage payment to make ends meet at the end of the month. The variable rate is convenient for those who may have some flexibility. This is definitely more unstable and changes in the market are unpredictable, mainly due to the spread. So, if you want to focus on savings and you have the option of not having to set a certain amount to pay each month, the variable rate mortgage could be an optimal choice. However, both fixed and variable rates can still be renegotiated over the years.
It should also be noted that in the case of short-term loans, rates tend to be low even if fixed, whereas in the case of mortgages that require a longer payment, the amount tends to rise.
Advice and curiosity: which loan to stipulate in 2019
In these months we have witnessed the rise in the spread, the situation has raised concerns for those who have already entered into a fixed rate mortgage. The concern is related to the fact that, if the spread continues to rise, rates will skyrocket . Those who have a fixed rate mortgage are not worried because, despite the changes in the market, the installment will remain the same. It is not certain that the installment increases, but could do so. However, this is a different topic for those who are going to take out a new loan now, as the European Bank assumes an increase in interest rates determined directly by the policy of the individual banks . If in recent years there has been a good or bad market, since prices were set by both the European indices (Eurirs / Euribor) and bank spreads, the situation in the new year could change and much. If the spread will continue to remain so high, banks’ balance sheets will be affected and mortgage rates will rise again.
Should this occur, it is clear that the best solution will be to make an agreement that guarantees a fixed rather than a variable rate.