Which is better, a fixed or variable rate mortgage?
Fixed or variable rate mortgage
Undoubtedly one of the main dilemmas we face when we buy a home is to opt for one or another mortgage. And in this search that seems to have no end the main problem is knowing whether to bet on a fixed interest or variable interest mortgage. Which is the best option? Pay the same year after year with a slightly higher interest at the beginning? Or pay a mortgage with a cheaper ticket but with an interest associated with the fluctuations of the Euribor?
This dilemma has become truly important since interest rates have reached historical lows to 0% since last March 2016.
As a result of interest at 0%, Euribor has stabilized in negative figures. Since this has happened, banks have reacted quickly to offer fixed-rate mortgages and secure profits.
But it is clear that although interest rates and the Euribor have reached the lowest data in their history, sooner or later they will have to rise again. The question is when. Well, depending on the time of its rise, it will be more interesting to maintain a variable rate mortgage than a fixed rate.
Although if we are rather conservative in our finances we will always prefer a fixed rate that allows us to know how much we will pay interest on our credit year after year. Especially if we remember the levels reached by Euribor in 2008, when it shot above 5%. This was a real problem for all those mortgaged with a variable rate mortgage. The monthly payments soared that many people lost their homes.
The perfect breeding ground for the appearance of fixed-term mortgages
With this drop in interest rates and a negative Euribor, it is not surprising that banks have opted for fixed-rate mortgages. If you look at most banks almost exclusively advertise this type of mortgages. Just look at the latest mortgages offered by CaixaBank or Sabadell.
In fact, little by little, these mortgages are displacing those of a variable rate, which, although they are still the majority, gradually lose customers.
According to the latest data collected by the National Statistics Institute (INE), 63% of the mortgages constituted in the month of October were variable rates.
However, in most cases, what is best for banks is not the best option for customers. Although the banks insist on selling them as a salvation table (especially to those affected by the mortgages with land that they created) the truth is that betting on the fixed rate raises many reasonable doubts for the following reasons:
- They are much more expensive than variable mortgages. Is it important to bet on security against price? It is true that mortgages have a high duration and we cannot know how interest rates will work during the 30 years that they can last. But does it compensate to spend more to get this security?
- At what time will interest rates rise? It is clear that the crux of the matter lies in interest rates. While these remain at 0% or very close to these figures, it will remain more interesting to bet on a variable rate mortgage.
- In what percentage does the Euribor have to be established to temporarily compensate the price of a fixed mortgage against a variable?
Is there a case where the fixed mortgage really is more economically advantageous than the variable rate mortgage? Well, the truth is that for this scenario to occur, we need to talk about mortgages of more than 20 years. And of economic scenarios in which the Euribor is located above 2% in a stable manner over time.