There are two types of mortgage credit to acquire a property: fixed and variable. What is the difference between a fixed-rate and variable-rate mortgage? Which one supposes greater benefits and advantages for those who hire it? Before deciding on one or the other, you must take into account three important factors: the interest rate, the term and the monthly installment to be paid.
What are the types of mortgages?
The mortgage is a right that links the ownership of real estate to guarantee the fulfillment of an obligation subscribed by contract. When you want to buy a property , you can go to the bank to request a loan and be able to make the sale. If the credit is granted then a mortgage is constituted. The bank grants the necessary amount to pay for the property, but this is linked as a guarantee . That is, it “belongs” to the bank while the credit is active.
Mortgages can be fixed rate and variable rate . If you don’t know which one is right for you, you can ask the experts at Mortgages 100 for help to find out which type of mortgage best suits your needs. There is a big difference between a fixed-rate and a variable-rate mortgage and it is linked to the type of interest paid on each one. This means that the financial entities with which a mortgage loan can be requested offer different conditions for each of these contracts. The advantages and disadvantages of these two types of mortgages can be measured by three factors: the interest rate , the monthly payment and the payment term .
The interest rate on mortgage loans
In fixed-rate mortgages, the same interest rate is applied for as long as the loan is active, therefore, the installment to be paid will always be the same ; it does not rise or fall due to fluctuations in the main economic indicators . The client knows how much he has to pay from the moment of contracting the credit.
Variable rate mortgages depend on a reference index, the Euribor . In these mortgages, the installment is made up of a fixed differential plus the reference index. This index can go up or down and in doing so, so does the monthly payment of the mortgage.
return period
Another difference between the fixed-rate and variable-rate mortgage is the loan repayment term . When it comes to fixed-rate mortgages, the repayment term is usually not more than 20 years , although there are some that have repayment terms of up to 30 years. Variable rate mortgages are offered for a maximum period of 30 years ; in some cases they can reach up to 35 and 40 years.
Fee to pay
As fixed-rate mortgages have a shorter repayment term, the monthly installments will be higher than those of variable mortgages. The advantage is that, once the repayment term has been set and the total amount has been divided by the number of months and the interest rate has been calculated, the installment will remain stable; This will not vary throughout the duration of the loan.
In variable mortgages , the return period is longer and the installments are considerably reduced . When the term and the base of the installment are fixed, the amount of the same can vary according to what the Euribor does.
Financing, another fact to take into account
In addition to considering the three factors described above, it is also advisable to look at the amount of financing that a mortgage offers. This amount, expressed as a percentage , varies depending on the type of home you wish to purchase. When it comes to a first residence , the percentage is between 70 and 80% of the value of the property , but provided that the amortization does not exceed 30 years . For second homes, the financing only covers 60% of the value and must be repayable within a maximum of 25 years. In any case, the applicant must not be older than 75 years .
In this sense, it is important to study the requirements that each financial entity asks of potential clients for the granting of mortgage credit . To begin with, 20% of the value of the property will almost certainly have to be contributed, which complicates the situation for some people. What happens if you don’t have that 20%? Can the mortgage be applied for anyway? It is advisable to seek the advice of experts who analyze your case, they can help you request a mortgage without savings.
Difference between fixed-rate and variable-rate mortgage: Which one to choose?
Choosing between one or another type of mortgage can be a challenge for those who want to apply for this type of credit. If you have the ability to pay , then it is best to contract a fixed-rate mortgage , with apparently higher installments than those of the variable rate, but with the certainty that this amount will not vary. On the contrary, variable-rate mortgages may be attractive to the client due to the reduced installments , but there is always the risk that the reference index rises at any time. Do you have sufficient payment capacity to face these installments and for a longer time? In addition to taking into account the factors mentioned above (interest rate, term and installment), the user must study the expectations of income.
