The interest rates of a mortgage loan
When we want to buy a flat or a house, most of us have the need to finance ourselves with a mortgage loan. The problem that currently arises is to decide between a fixed or variable interest mortgage.
Only 4 or 5 years ago, only 10% of the mortgages that were hired were made at a fixed rate. Currently they are the protagonists in the real estate sector already exceeding 40% of hirings.
On the other hand, the Spanish government also wants to encourage mortgage loans at fixed interest and proposes to reduce expenses so that it costs less to change mortgages, but ... is it the best decision to buy a flat with a fixed-rate mortgage?
In most cases, it is the banking entities themselves that encourage their hiring, and users think that it is a way to protect themselves against a possible rate hike.
Which are better, mortgages at a fixed or variable rate?
There is no clear answer or absolute truth on this issue, really this dilemma has always been the big issue for those of us in the process of buying a home. It is nothing new, but decisions change depending on the economic situation and interest rates.
There is no fixed rule to say whether fixed or variable loans are better, the choice depends on the circumstances of each moment, especially our personality. If we want to save in the short / medium term, we will choose a variable rate mortgage. If what we want is peace of mind and always pay the same fee for our mortgage (a fee that we feel comfortable with), we will choose a fixed rate mortgage.
Mortgages at a fixed rate
• The interest rate is constant, therefore, we will know in advance our fixed monthly payment throughout the life of the loan.
• The increases in interest rates do not affect them.
• Stability is the main asset of this type of mortgages since the loan is not subject to what happens in the market.
• Initially the fee is much higher compared to variable rate mortgages.
• Higher opening fees.
Variable rate mortgages
• The applicable interest varies depending on the evolution of the interest rates, generally referenced to the Euribor. In this case the types can go up or down.
• The initial interest rate of a variable mortgage is always lower, so you pay less at the beginning.
• Mortgages of fixed interest are longer reaching 40 years.
• More limited commissions
• Most variable rate mortgages include differential bonuses.
• The mortgage fee will not be fixed because it will change with each renewal.
• Uncertainty about what may happen in the future with the Euribor. And it is that if the interest rates go up (and the Euríbor with them), the quota of the loan can shoot.
What is the best decision?
Currently the one-year Euribor, the reference index for variable-rate mortgages is at historical lows, in negative. But everything points to the fact that the descent is over.
Although no further declines are expected, it does not seem likely that there will be increases in the coming months, as the European Central Bank has announced that it will not raise interest rates until at least 2020. Once the economic recovery has been consolidated, it is foreseeable that short-term interest rates tend to rise to more normal levels.
A realistic scenario could be that interest rates return little by little to levels close to 2%, below 1% and stable over the next two years, around 1% and 1.5% over the next five years and rise to 2% will happen within 10 or 15 years. But it seems clear that in the short term interest rates will remain at similar levels.
In more pessimistic scenarios, where the rates rose faster and at higher levels, the option of a fixed loan could be more interesting. Those who are more pessimistic about the future evolution of interest rates and do not want to assume the uncertainty of possible increases may be interested in choosing a fixed rate loan.
Totally inadvisable to sign loans to mixed type. They offer a fixed rate for the first 10 years, depriving them of low current interest rates, and a variable one later, when increases are more likely.
Taking into account the conditions that entities are offering at the moment, from our point of view, variable rate loans, to date, are still more interesting than fixed rate loans.
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