When buying a property, the dilemma that often arises is always the same: it is Better to opt for a fixed or variable rate mortgage? In the collective imagination, we tend to believe that the fixed rate mortgage tends to freeze the interest rate for the entire repayment term. Conversely, the variable rate mortgage may face potential decreases or price increases in the long term. Which is why, although there are all the conditions for a lower outlay than a fixed-rate mortgage, a variable-rate one appears significantly more risky.
In relation to choosing the best mortgagebetween the fixed-rate and variable-rate solutions, various factors are called into question, sometimes even personal and closely connected to the real needs of the applicant. For obvious reasons, they should all be taken seriously, so that the overview of the final decision can be as clear as possible. But let’s see in detail to understand more what it is and what are the Differences between fixed and variable rate mortgages.
Who decides the interest rates?
To complete a more informed choice between the fixed or variable rate mortgageFirst, it’s good to know who decides the interest rates. The answer lies in the choices made by the Central Bank of the reference area which in our specific case corresponds to the ECB (European Central Bank). This means that the action of every banking institution active in the territory of the countries belonging to the EU is influenced by this body.
In this sense, the ECB is responsible for regulate the flow of money circulating in the euro area. To achieve this goal, raise or lower the interest rate, in relation to the set economic objectives. For example, to stimulate economic growth, interest rates are lowered in the face of crises. Conversely, in order to avoid inflation risks, the ECB may opt to raise interest rates.
What are the trends between fixed-rate and variable-rate mortgages?
In recent years, between Italian families the mortgage that is the most popular is that a fixed rate. The absolute uncertainty about the economic scenario and the safeguarding of one’s interests in the long term mean that in Italy a certain predisposition for fixed-rate mortgages prevails. As for i thirty-year or twenty-five-year repayment plansthis trend is even more evident.
Different chapter for i mortgages at least fortnightly. Consider subscribing to a variable rate mortgage it is feasible because the period of time is shorter and, therefore, the risk of a sudden increase in the monthly loan payment appears lower.
In relation to choosing the loan that best suits your needsthe applicant can ask the credit institution for an appointment at the branch and, after analyzing the free and non-binding estimates, can begin to reflect, also taking into account the forecast parameters, the global ones and, obviously, the individual ones.
What are the differences between a fixed and variable rate mortgage?
There main difference which elapses between fixed rate and variable rate mortgages it turns out strictly connected to the type of rate applied. If regarding the fixed rate solutionfinancial institutions tend to base the value on the Euris (Euro Interest Rate Swap), as regards thevariable rate optionI am the ECB rate and the Euribor (Euro Interest Bank Offered Rate) the benchmarks.
Another important specification to pay close attention to is the one concerning the relationship between the rates and the monthly installment to be paid. Both, in fact, must not be confused with the amount to be paid. The installments can be constant for the entire amortization plan or change over the years. The variable rate mortgage, in this sense, offers maximum flexibility in terms of interest rates.
Of the two most popular options, the first, known as variable rate mortgage with capimposes one capped interest rate. Its main advantage lies in the fact that the borrower knows the greater value of the installment well in advance.
The second, note how variable rate mortgage with constant rateis a loan that allows the borrower to be aware about the value of the installments to be paid over the years. Only the duration of the repayment plan will vary, in the face of any increases or decreases in the interest rate.
What is a mixed rate mortgage?
In the face of legitimate indecisions on the choice between a fixed rate mortgage or an adjustable rate mortgagefinancial institutions propose a further solution: the mixed rate mortgage. The person concerned has the right to change the fixed rate, switching to the variable one or vice versain the event of pre-established deadlines on specific occasions during the loan repayment period.
The best choice according to your needs
After understanding the Differences between fixed rate and variable rate mortgagesthe following step focuses on making the final decision, choosing the one most in line with your real needs.
In principle, for short-term mortgages, i.e. not exceeding 15 years, the variable rate is convenient. Many Italians opt for this choice when there is a property to renovate, then ready to be inhabited or to be resold. Should there be an increase in the interest rate, the repercussions would only concern a minimal principal amount. The underlying reason lies in the fact that during the first years of the loan, this has already been largely paid off.
For long-term mortgages, over 25 years, the fixed-rate mortgage is the preferred solution, because for the entire duration of the repayment plan, the borrower knows both how much the installment costs and how much the interest rate is . This explains why the option in question is the one considered ideal for the purchase of a property and, in particular, for that of a first home.
Furthermore, the variable rate mortgage is convenient if the borrower seriously believes that he can repay the amount disbursed by the financial institution before the normal deadline. With the fixed rate, in fact, the person concerned would find himself having to pay off a long-term protection that would be purely useless, as it is not fully exploited.
Now that you know in detail the differences between the fixed or variable rate mortgage you just have to request a free online quote to know more!