If you are thinking of buying a home by taking out a mortgage, you may have doubts about how this type of loan works and what are the most relevant aspects of this commitment that you will acquire in the long term.
And it is that at the time of information you can see that while at the beginning of 2016, the mortgages that were contracted at a fixed rate barely reached 10%; currently that figure reaches 40%. You will also find out that the Government is encouraging fixed rate mortgages and has proposed to reduce the costs of changing the type of loan. The question that does not lose its validity is, what is more convenient, to take out a fixed or variable rate mortgage?
Why are fixed rate mortgages on the rise?
The increase in fixed-rate mortgages has to do with the promotion that the entities themselves have been doing to them. It also tells that their preference among applicants has grown as a protection strategy against the possible rise in rates.
In fixed loans the interest is constant throughout the life of the loan . Therefore, these loans are not affected by interest rate hikes. The disadvantage is that they cannot be favored of the descents either.
When considering whether the fixed rate is your best option, you must bear in mind that fixed mortgages have a differential, this is the interest charged by the bank for placing your money in mortgages, which is higher than that of variable rate mortgages. . This greater differential is the cost of being able to guarantee the same quota regardless of fluctuations in interest rates.
What is the outlook for variable rate mortgages?
In variable rate mortgage loans, the applicable interest varies depending on the evolution of interest rates. The rate can go down or up, obeying a theoretical calculation that takes into account the latest records of the benchmark indices. The main indicator for calculating mortgages is the Euribor.
Throughout the duration of the loan, the rates applied will depend on the rise and fall of interest rates.
What determines the convenience of fixed or variable rate mortgages?
There is no single factor in deciding whether fixed or variable rate mortgages are more advantageous. Choosing between the two depends on the circumstances of each moment. Considering the perspectives on the evolution of interest rates.
The benchmark indicator, the Euribor, has remained at historic lows, stabilizing in recent months with small fluctuations in a narrow range. Experts agree that the continued decline in this index has already ended. However, although no further declines are expected in the Euribor, it does not seem likely that the index will suffer accelerated rises in the coming months. The European Central Bank is not expected to raise interest rates until well into 2019.
The forecast is that interest rates in the short term will tend to rise to more normal levels. A realistic outlook is that interest rates will gradually return to levels close to 2% . So it is expected that in the next two years the index will be around 1% and, in the next five years, it will reach 2% where it would remain stable. Under these perspectives, variable rate loans look more attractive than fixed rates.
Despite optimism, it is always difficult to make projections as long as 10 or 15 years, what does seem clear in the short term is that interest rates will remain low.
In a less flattering picture, assuming that rates rise faster and stay high, it could be advantageous to have taken out a fixed loan.
On the other hand, the acquisition of a mixed-rate mortgage is not recommended at all. The mixed rate offers a fixed rate for the first years, which prevents the contracting parties from enjoying the current low interest rates and, later, the rate will be variable, when the increases in the benchmark indices are expected to take place.
Given the conditions in which entities are offering loans at a variable interest rate, with low rates, they are more interesting than loans at a fixed rate.
In any case, to decide if a fixed or variable rate mortgage is more convenient for you, it is advisable to carry out a simulation by putting yourself in the worst case scenario in order to see if your family finances could support higher installments. This taking into account that the rise in rates is the main cause of defaults. In both cases, whether you are looking for fixed or variable interest rate loans, you can count on the timely advice that we offer you at Sky Marketing.