A mortgage loan at a fixed rate (fixed mortgage) and a variable rate mortgage loan (variable mortgage) are differentiated mainly by the interest rate applied to them, which in turn means that financial institutions offer different conditions for each one. To determine the advantages and disadvantages when choosing a fixed or variable mortgage, it is convenient to analyze three factors mainly: interest rate, term, and quota.
Type of loan interest
In a fixed mortgage, the same interest rate applies throughout the life of the loan https://www.purplepayday.loan/. This means that the fee to be paid is always the same, neither goes up or down, so the client knows in advance the fee to pay, avoiding surprises derived from the rises of the Euribor (or another reference index as agreed).
In a variable mortgage, the interest rate is composed of a fixed spread plus a reference index (usually the Euribor). In this way, the fee to be paid may increase or decrease depending on how the reference index does it.
The most common is that financial institutions offer their fixed mortgages at a higher interest rate than their variable mortgages offer.
In a fixed mortgage the terms granted to pay the mortgage tend to be shorter, which limits the possibility of facing lower fees. On the other hand, once the term is set, the fee to be paid will remain unchanged, neither increases nor decreases.
In a variable mortgage, they usually offer a longer term when paying the mortgage, which opens the possibility of facing lower fees. Also, once the term is set, the amount of the fee may change according to the benchmark index (Euribor). The most common is that every six months, the interest rate of the mortgage is updated taking into account the value of the Euribor.
Taking the same repayment term as a reference, the monthly installment of a variable mortgage is usually less than that of a fixed mortgage, since variable mortgages are offered at a lower interest rate.
For example, for a 25-year mortgage on a new house as the first home that costs € 150,000 and a mortgage of € 100,000 is requested in the province of Madrid, the monthly installments to March 2017 would be:
Fixed mortgage: The option for those who prefer to be sure to always pay the same monthly payment, and protect themselves from possible increases in market interest rates. The ability to pay the mortgage in a shorter period of time must be assessed.
Variable mortgage: The choice for those people who want to pay a lower fee, but linked to the reviews that are made according to the Euribor.