Difference between fixed and variable rate on mortgage

Difference between fixed and variable rate on mortgage

When choosing a mortgage you will be faced with the choice of the interest rate, or the percentage that you pay each year to the bank for the service that they offer. Rates, together with the costs of the bank and its gain (spread), they form the Synthetic Cost Index, ie the total cost of the mortgage. The main choice is between the fixed rate and variable rate. What will these two options? What is the difference between fixed and variable?

Which one to choose?

Which one to choose?

Fixed rate

The fixed rate is determined at the beginning of the loan and results in a higher rate than variable. You should choose the fixed rate at a time when the interest rates are very low, to make an installment loan with an easy-to-face or abrupt increases over the years (often decades) of repayment duration.

Variable rate

It is a rate which value changes according to the value of an index. It has the advantage of offering a payment amount lower than the fixed rate, but in case of increase of the Index, the value of the rate will be increased. On the other hand, in case of descent of the reference index, the value of the rate decrease.

The fixed rate at the beginning costs more because the customer pays an interest rate to the bank plus the cost as a percentage of the insurance that the bank stipulation to protect itself, but it has the advantage of always having the same rate and the same installment. The variable rate at the beginning, however, has some costs because you pay each time only one interest rate (without the afformentioned cost of insurance) but may vary over time.

So what rate should be chosen? If you point to the security and it is believed that interest rates are currently low, you can opt for a fixed rate, which makes us pay a little more, because the bank also takes into account the insurance premium. If the rates are high and are expected to fall, you will opt for a variable rate, so you do not necessarily anticipate a surplus for the insurance, but with the bank agreeing to share the risk of rising interest rates if and when it will happen, and to share the savings with the bank lowering when interest rates, if and when it will happen.

By +Nikos Kontorigas

About Nikos Kontorigas

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