One of the most difficult decisions to make for those who contract a Mortgage is to choose between variable or fixed interest rate.
However, an analysis of the available data may allow a choice of the best mode for your specific case. In this article we will leave you some lights and new points of view to make a more informed decision.
Want Stability or Uncertainty in Your Mortgage?
But first, it should be borne in mind that whoever opts for variable rate is exposed to the market oscillations reflected in the interest rate. Likewise, those who opt for fixed rates seek tranquility and have strong convictions that, for a long enough time, the variable rate will remain above the fixed rate.
Of course, such conviction is not always reciprocated, as can be seen by all the clients who have contracted housing loans in recent years, who, from one moment to the next, as a result of the financial turmoil that followed, saw variable interest rates drop to a minimum .
This instability is an example of how not always, convictions, however well founded, may approach reality. Economic indicators in this field may determine what tomorrow will be for interest rates.
Is it Height to Set the Interest Rate on Your Housing Credit?
However, there are many news companies who announce that this is the ideal time to opt for fixed rate mortgage lending. Personally, I have already stated that I am an advocate of variable rates, not only because the customer has the guarantee that he will pay only what is owed, but also, because it follows the evolution of the market.
In addition, there is no advantage in most banks of contracting such an interest rate modality in determining the spread , and in general the spread applied to a fixed-rate housing credit is equal to, or very close to, the variable rate modality.
Obviously, such a variable rate decision may represent at a time of generalized interest rise, a burden on the families’ financial budget that may be difficult to circumvent. However, the reverse is also real in the sense that a decrease in variable rates may represent a loss for customers who hold fixed-rate housing loans.
How do you anticipate a rise in interest rates?
A simple way to foresee the evolution of interest rates is to carry out a basic analysis of direct and indirect economic indicators. For example, in response to the economic crisis we are experiencing, the interest rate needed to be lowered significantly in order to stimulate investment. Thus, in periods of crisis, a reduction of interest rates is normal with the aim of stimulating the economy.
Carrying out a thorough analysis to determine what interest rate to choose when hiring your home loan is not a simple task and most people are unaware of how they can do such an analysis. However, it is not necessary to have the technical knowledge to assess whether there is a possibility of obtaining gains from the contracting of your home loan with a flat rate, always bearing in mind that it is a risk that it assumes in the sense that such a forecast may not correspond to the reality.
The procedure is simple and you can carry out the consultation of the SWAP interest rates that serve as a reference for banks in determining the fixed rate of housing credit and make a comparison with historical variable interest rates (Euribor), or even evaluate what the market expects interest rates through forward rates.
- The choice between fixed or variable rate means choosing between stability or uncertainty;
- The fixed rate has the advantage that the performance during the contracted period does not change;
- The variable rate has the advantage of paying exactly what is due;
- The variable rate has a lower penalty for early repayment;
- The fixed rate has the particularity of being determined one business day before writing. This particularity creates uncertainty in the hiring due to the mismatch between the approval and the writing.
- There is no differentiation in terms of the spread between fixed and variable rate housing loans;
- The interest rate will rise in the coming times. When and when it is not possible to determine;
- The fixed rate option depends on the expectations of the evolution of the variable rate;
- Forward and SWAP rates may be good indicators for fixed rate housing credit.
As you can see, many considerations can be obtained with the theme Fixed or Variable Interest Rate in Housing Credit . Considerations that I hope to see clarified in the next articles on the subject.