Mortgage Credit: Fixed, mixed or variable interest rate?

Mortgage Credit: Fixed, mixed or variable interest rate?

The interest rate you choose for your mortgage directly impacts the amount you will pay monthly. You can choose between a fixed, variable, or mixed rate. But what does each concept mean, how does it work, and how does it impact the credit?

11 Aug 20237 min

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What is a fixed interest rate?

Hiring a fixed interest rate for your home loan implies that the value of the rate does not change from the beginning to the end of the contract, since it is not associated with any index. In other words, regardless of market variations, the monthly payment will remain the same as agreed with the bank at the time of hiring.

To determine the amount you will pay for the fixed fee, the bank takes into account several factors: the value practiced in the interbank market, influenced by macroeconomic events (such as financial crises, war, the pandemic), as well as the customer's profile, considering the risk of default, the guarantees they have, and the loan-to-value (relationship between the loan amount and the property value).

What are the advantages and disadvantages of the fixed rate?

By choosing a fixed interest rate, you guarantee greater stability and security, always knowing the value you will pay at the end of the month for your home loan. Since the installment is not revised, you are not caught off guard by the uncertainty of how much you will pay in interest at the end of the month.

With the predictability of having a fixed interest rate on credit, it is easier to manage the monthly family budget, always allocating the same amount for savings.

However, the interest rate of this fixed rate is usually higher than the variable rate values with the same conditions. But this factor depends on the European economic context we are going through, so currently, for example, it is not observed, as we will see below.

What is a variable interest rate?

Once a variable interest rate is associated with a benchmark, so it depends on variations. The variable rate is indexed to Euribor, which, whenever it goes down or up, causes the rate value to follow. But to better understand this aspect, let's understand what Euribor is and how it works.

The Euribor represents the average interest rates practiced in the loans of Eurozone banks. It is defined by the European Banking Federation and is the reference index for various financial products, such as mortgage loans.

This indicator can be chosen by credit borrowers in various terms, with the most common ones for home loans being 3, 6 or 12 months. This means that if a customer chooses the 3-month Euribor, their credit installment is reviewed quarterly, and if the Euribor is rising, the monthly payment will also increase.

The value of the variable rate is determined by adding the percentage of the Euribor and the spread, another mortgage credit rate. Essentially, the spread is equivalent to the bank's profit margin, and is defined by the client's risk level, guarantees provided, the property value, and additional credit products.

What are the advantages and disadvantages of the variable rate?

In line with the advantages and disadvantages of the fixed rate, the opposite happens with the variable rate. In other words, the biggest advantage of hiring a variable rate is that, as a rule, the value is lower than a fixed rate.

Whenever the Euribor is at low values, the variable rate follows suit and can make the monthly installment of a mortgage relatively low. This can lead to a more flexible monthly budget, which can be put into savings at poupancanominuto.com.

But the disadvantage is that it offers less stability than the fixed rate, as it can change whenever the installment is reviewed within the chosen period. If the Euribor rises to high values, your installment may increase by several hundred euros. And with these fluctuations, it is not possible to predict how much you will pay for the interest rate on your loan.

Mixed interest rate: Hire both regimes.

There is still an option you can choose for your credit, which combines the two regimes above: the mixed interest rate. A mixed rate offers a fixed rate for a certain period of time, agreed upon between the client and the bank, and after that, the rate becomes variable until the end of the contract.

It can be a good option for customers who prefer to experience both regimes, in an initial phase of life where they do not have the capacity to cope with unforeseen events with a fixed rate, but in a more advanced phase they will feel comfortable with the unpredictability of the variable rate.

Thus, the advantages and disadvantages of hiring a mixed rate depend on the timing and context in which it is hired, as it will be difficult to predict how Euribor will be at the moment it switches to a variable rate.

How to choose the right interest rate for my home loan?

The right rate for your home loan depends on numerous factors, such as your financial profile, the evolution of your income, your preferences and short, medium, and long-term goals, and the European economic context.

Analyze your financial profile, to understand if you are a saver and usually have a monthly buffer, or if you usually have many expenses and need a lower monthly payment for your housing credit; if your professional life is stable, with or without career progression and income growth expectations; if you can afford a monthly buffer in your budget to support an unexpected rise in interest rates; if you plan to increase your family in the future, or need to save to invest in a business. These are all questions you should consider when choosing the rate you want to apply to your credit.

What is the impact of having a fixed or variable rate currently?

Through a practical example, we will understand the impact of having a fixed or variable rate on a mortgage loan.

Let's consider a home loan amounting to 250,000 euros, with a variable rate linked to the 6-month Euribor, a spread of 1.2%, and a maturity term of 30 years.

We will take into consideration the 6-month Euribor rate in May (effective in July), which is 3.516%. Therefore, the interest rate (APR - Annual Nominal Rate) of this loan will be 4.716% (spread+indexing). Thus, the monthly installment to be paid for this loan will be 1,299 euros.

But if we consider the same credit and conditions, with a fixed rate, and an APR of 4%, the installment will be lower. In this case, you would be paying a monthly installment of 1,193.54 euros for your mortgage credit.

That is, currently, depending on the credit conditions, it is generally more beneficial to hire a housing loan with a fixed rate than with a variable rate. There are also ongoing campaigns by banks offering mixed rates, which offer very low fixed rates in an initial period, and then switch to variable rates.

However, you should remember that when Euribor rates start to decrease, they will eventually be at lower values than fixed rates.

In this process, it is essential to request simulations from several banks in order to analyze different credit proposals and various interest rate options and other conditions. Because it is a time-consuming and bureaucratic process, you can always hire a credit intermediary to help and accompany you, like Poupança no Minuto. The service is completely free and involves a financial analysis of your situation and objectives, which is then sent to banks, negotiating the best conditions for you. In the end, they help you compare proposals and make the best decision for your family.

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