The interest rate is key, since together with the term of the loan, it determines the total amount of the loan and, therefore, the monthly installment that will be paid for its amortization during said term. It must be clear that the interest rates that they can offer us:
Fixed interest rate
The interestremains unchanged throughout the life of the mortgage loan. In other words, if the rates go up they don't hurt you; But if they go down, you don't benefit either. In fixed rate cases, the repayment term is usually shorter than in the variable rate, and is between 12-15 years.
Variable interest rate
You are subject to fluctuations in interest rates. Generally, for half or a year, an initial interest rate is fixed, which is revised depending on the behavior of the rates. For these revisions to the agreed reference base (generally Euribor) adds a differential that can range between 0.40 and 1.50 points. This option allows you to benefit from rate cuts but is also exposed to the risk of increases.
In order to alleviate the drawbacks of both, "hybrid" financial products are emerging that try to better adapt to individual needs. We can highlight three formulas:
- Mixed interest rate: A mixed formula consists of negotiating a mortgage loan at a fixed rate during the first years (three or five), and the rest of the time until its cancellation at a variable rate. In this case, the loan conditions (repayment terms, commissions ...) are usually similar to variable rate loans. The advantage of this option is that it allows young people to set conditions smoothly during the first years.
- Fixed installment mortgage: They are loans at variable interest but with a repayment fee that does not vary. That is, we always pay the same each month, but if the rates are increased, we will have to pay more installments / months. If the rates fall, our debt will be lowered and therefore we will pay less installments / months.
- Variable mortgage with roof. These are loans in which a maximum ceiling for interest rates is agreed for a period (generally the first 10 years), thus avoiding the risks that, in case of excessively raising interest rates, a non-assumable repayment installment will not be reached by the family economy.
- If you choose a mortgage or loan with fixed interest rate Keep in mind that if market rates drop considerably, you may be able to renegotiate the conditions or an early cancellation. For this reason, financial institutions set cancellation fees that are usually more expensive in the case of a mortgage with fixed interest rates. The fixed interest rate and the cancellation fee must therefore be valued together.
- In general, the interest rate is important but we must not get carried away by very tempting offers based on a very attractive rate for the first years and we forget other fundamental aspects such as commissionsThis will force us to actually talk about Cost effective, APR.