Fixed or variable rate mortgages?

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One of the uncertainties when signing a mortgage is whether to opt for the fixed term or on the contrary for the variable one. It's a decision you can trust pay more or less money for an excessively long period of time due to the useful life of this financial instrument. This decision must be made based on a series of variables, even though one of the most determining factors will be that which has to do with the evolution of interest rates in financial markets. To the point that these data will give you more than one clue to select one or another financing model.

Whatever the case, the price of money will be vital so that you can link your mortgage to one or another interest rate. Currently, the decision of the European Central Bank (ECB) to lower the price of money It has made buying variable-term mortgages much more profitable than before. Because depending on this monetary strategy, the savings you will have in the monthly payments will be greater. In this regard, it must not be forgotten that interest rates in the euro area are at minimum levels. A factor that helps you select this mortgage option.

The price of money in the eurozone countries is at 0%. This in practice means that the money is worth nothing and therefore it is always much more satisfactory for your interests to subscribe a variable rate mortgage than a fixed one. Regardless, this is a scenario that won't last all the time and at any moment it can turn around and catch you in a changed step. With which, it can generate a series of risks in the medium and long term that you should pay attention to when formalizing this financial instrument. Because there is a lot of money at stake in this type of high value operation.

Mortgages: the most contracted?

According to the latest data provided by the National Statistics Institute (INE), it is clear that the variables are the majority among Spanish users. When verifying in its report that in mortgages constituted on homes, the average interest rate is 2,73% (13.5% lower than in December 2016) and the average term of 23 years. While 62.5% of home mortgages are variable rate and 37.5% at a fixed rate. Another relevant data from this study is that fixed rate mortgages experienced an annual rate increase of 4.9%.

The INE monthly report also highlights that the average interest rate at the beginning is 2,54% for mortgages on variable rate homes (with a decrease of 18.6%) and of 3,13% for the fixed rate (3.5% more under). As for the total number of mortgages with changes in their conditions registered in the property registers, it is 5,519, 24.4% less than a year ago. With regard to housing, the number of mortgages that modify its conditions it drops 17.6%.

With what type do you pay less?

One of the questions that arise is with what interest rate in summary they will pay less money for the formalization of their mortgage loan. Well, everything will depend on in which scenario the interest rates are presented at each moment. For this, you are in a position to save a few euros through the monthly installments. In the current one, the most advantageous thing is to lean towards the variable rate. Among other reasons, because you can find in the current mortgage offer extends even below 1%.

This has a lot to do with the evolution of European reference, the Euribor, to which more than 90% of variable rate mortgages in our country are linked, according to data provided by the National Institute of Statistics. This is due to the fact that this reference source is at all-time lows. Specifically, after many years it is in negative territory, particularly at -0.161. And this helps your outlay for this product to be lower than before and in any case more profitable than if you opt for the fixed rate of your mortgage.

Fixed rate valuation

Whatever the case, users have noticed a change in recent months. In favor of mortgages at a fixed rate above the variables. This variation in the aptitude of the clients is mainly due to a change of scenario in the monetary policies. In the European Union, interest rates are expected to start rising later this year, albeit gradually. Something that has already begun to develop in the United States, where the interest on money has risen to levels of 1,50% and 1,75%. Faced with this new scenario, fixed-rate mortgages once again enjoy the preference of applicants.

Applying this strategy can be very profitable for your interests in the medium and long term. The reason is that you must make a greater economic effort, but over the years it will balance out as a result of a lower differential with respect to variable-term mortgages. In this regard, the average interest rate at the beginning of the operation is 2,54% for mortgages on variable rate homes and 3,10% for fixed rate mortgages.

Always with the same monthly rate

But you will also have the advantage that you always you will pay the same monthly fee. Whatever happens in the financial markets. So that from this dynamic you are in a much better disposition to plan your personal or family budget. Because you will not have any surprises during the duration of the contract. Unlike the variables that depend on the fluctuations of the financial markets. In this regard, if your intention is to have greater peace of mind from now on, it is best to formalize one of the variable rate mortgages. Even when at the beginning you pay more money, after several exercises the amount of this financial instrument will be reduced.

From this scenario, you should also know that at a fixed rate the commissions are more demanding. Because in effect, they apply an interest that oscillates between 1% and 1.5% and that on the other hand they usually incorporate in some cases a risk commission for the interest rate. It is a risk that you must take to opt for this alternative to financing. In exchange for not having variations in mortgage expenses. They are the lights and shadows of both models of financing for the purchase of a home.

Scenario in interest rates

Whatever the case, if your intention is to subscribe a mortgage loan today, perhaps the best decision is the variable rate because it is the most profitable option. Because their spreads are more affordable for your personal interests. But if you observe more in the medium and long term because you will not have news throughout the life of the mortgage. It will not give you the same, what arises in the financial markets, even if a scenario of rising interest rates is reached. In other words, at first you will pay more money, but later your personal accounts will balance or improve.

Currently, fixed rate mortgages have an interest rate higher by one or two percentage points regarding the variable rate. Therefore, it is a very personal decision that can change at any time and depending on the monetary policies of the European regulatory bank. On the other hand, there is also the alternative of mixed mortgages, which is a very particular mix of both models. With the advantages and disadvantages of these financing formats.

Conditions of stay

From now on, you just have to take the calculator and check which is the best recipe to pay less euros in your monthly payments during the periods of permanence of these financial instruments. In this regard, the maximum repayment term has been lowered to 35 or 30 years. After almost 50 years before the economic crisis. Not surprisingly, it is another of the factors that you should pay attention to to understand if it is convenient for you to take out a fixed rate mortgage or on the contrary a variable one.

On the other hand, another element of analysis is commissions, which in the current scenario are being minimized. It is increasingly common for them to be exempt from these charges as a result of a very low interest rate scenario. Whatever the case, they represent up to 2% of the amount demanded in the operation. And that in summary they can increase the final cost for its formalization from now on. On the other hand, there is also the alternative of mixed mortgages, which is a very particular mix of both models. With the advantages and disadvantages of these financing formats.