Deciding between a fixed or variable mortgage can be a hassle if we are not sure where we are. It is the problem of many people when going to sign a mortgage, deciding between one and the other. Actually, both options have their good and bad peculiarities, but everything will depend on the context in which the person is. The context that may end up having the most influence on this decision may be monetary policies, the capital available, and an emotional predisposition to risk or not.
There are many websites that talk about the advantages and disadvantages between acquiring a fixed or variable mortgage. It can be a bit confusing for people who are more into letters or visuals and not so many numbers. That is why the claim of this article is that, without neglecting what is the most profitable or successful, bring it a little closer to the general public and make it well understood that those interests hide through graphics and examples. In this way, help determine according to your profile which mortgage you may prefer.
Main differences between fixed or variable mortgage
Assuming that we all know what a mortgage is, we are going to see the main differences between one and another mortgage.
- Fixed mortgage: Its main advantage is that we will know what quota is going to come to us every month until expiration. A fixed mortgage maintains a fixed interest rate for the years that it will be in effect. So, if it is at 3% (for example), we know that each year we are going to pay 3% of the outstanding face value (“what remains to be paid”). That is, if after 4 years, we have 90.000 euros pending, that fifth year we would pay 2.700 euros in interest (3% of the 90.000 euros that remain pending). As it is a fixed interest, the bank will usually apply a higher interest than a variable interest mortgage.
- Variable mortgage: Its main advantage is that at the time of signing it, the% interest that will be charged on the mortgage will be lower than that of a fixed mortgage. However, a variable mortgage as the name suggests does not maintain a fixed interestInstead, it is related to a reference index, in the case of Spain the Euribor. That means that if the Euribor does not move, or goes down, our mortgage will stay or go down. If, on the other hand, it rises, the interest% that will be applied to us when the interest on the mortgage loan is renewed will increase. For example, we have spent the last year paying 0'80% interest on our loan and we have 90.000 euros left. If it is maintained, next year we will pay 720 euros (0% on the 8 euros). If it falls by 90.000%, we would stay with 0% (20'0-60'0 = 80) and we would pay 0 euros in interest next year (20% on the 0 euros). But, and this is what discourages people, if it suddenly went up 60%, next year we would pay 540 euros (and it could continue to rise year after year).
A fixed or variable mortgage depending on the moment
This graph corresponds to the average interest rate at which mortgages have been signed in recent years. Fixed mortgages in blue, and variable mortgages in yellow. The data is provided by the INE, and a very good website from which to extract this data at a stroke thanks to its graphs is epdata.es which I recommend for the large amount of information it provides.
The drop in the Euribor has accompanied the interest in mortgages falling, as we can see in the graph. The fact that interest rates reached levels below 0%, has pushed many people to prioritize the security of the fixed mortgage over the variable one. In fact, In 2020, more mortgages were signed at a fixed rate than at a variable rate. It even made it easier for many people to change their variable to fixed mortgage. The main reason, to protect against possible increases in interest rates. Increases that have not arrived either, as a mechanism to boost consumption and make credit flow is to keep rates low.
According to monetary policies on interest rates
It is true that the pandemic has turned many economic forecasts upside down, but if we focus on the past and the main mechanisms to boost the economy through the ECB, interest rates should not have strong rises, at least in the short and medium term . This means that it would be more interesting to pay a mortgage with a variable interest, especially if it is for a few years. However, the longer it is, the more justified it would be to take a fixed rate to protect against possible interest rate increases.
Something that we must determine is our position and the risk that we can assume (financially and emotionally), since a 1% variation implies thousands of euros in all the years of a mortgage. In addition, it should be remembered that at the beginning is when the bulk of the capital is paid. As the years go by and it is amortized, that interest decreases in proportion to the capital contributed in each letter.
According to the capital available to the buyer
We imagine that we have a buyer who has more capital than what he contributes. In the event of further increases, capital could always advance. In the meantime, and in the event that the interest continues to fall, or increase, but slightly, you could decide not to make use of that capital. Even your preferences could be that of investment, which would be more interesting as long as it gave you a higher return on invested capital than the interest you pay on your mortgage.
The provision of liquidity can provide insurance against rises also. If you have money that is not used, and the interest rate of a variable mortgage rises a lot, it would not be a bad idea to amortize part of the principal.
Another scenario would be that of a person who wants to be in control of their expenses, and that less than the security of knowing in advance what they are going to pay. In this way, a fixed mortgage would be the ideal choice.
Emotional predisposition to risk
If we are people risk-averse, a fixed-rate mortgage would be the best option. Especially if we see news on television that interest rates are going to rise, and they are going to affect mortgages referenced to the Euribor. In contrast, if such news does not cause us nervousness, and we consider that future cuts in the Euribor may occur and thus benefit us in our mortgages, the variable would be a better option. In addition to being percentage lower than average at the time of signing.