Mortgage credit: Fixed, mixed, or variable interest rate?

What is a fixed interest rate?  

Hiring a fixed interest rate for your home loan implies that the value of the rate does not change from the beginning to the end of the contract, since it is not associated with any index.  In other words, regardless of market fluctuations, the monthly payment will remain the same as agreed with the bank at the time of hiring.

To determine the amount that it will pay in fixed fees, the bank takes into account some factors: the value practiced in the interbank market, influenced by macroeconomic events (such as financial crises, war, the pandemic), as well as the customer's profile, taking into account the risk of default, the guarantees it has, and the loan-to-value (relationship between the loan amount and the property value).

What are the advantages and disadvantages of fixed interest rates?

By choosing the fixed interest rate, you ensure greater stability and security, always knowing the amount you will pay at the end of the month for your housing credit. Since the installment is not revised, you are not caught off guard by the uncertainty of how much you will pay in interest at the end of the month.

With the predictability of having a fixed rate on credit, it is easier to manage the monthly family budget, always allocating the same value for savings. Save now at poupancanominuto.com.

However, the interest rate of this rate is usually higher than the values of the variable rate with the same conditions. But this factor depends on the European economic context we are overcoming, and, currently, for example, it is not verified, as we will see below.

What is a variable interest rate?  

Already a variable interest rate is associated with a benchmark, so it depends on variations. The variable rate is indexed to the Euribor, which, whenever it goes down or up, causes the value of the rate to follow. But to better understand this aspect, let's understand what Euribor is and how it works.

Euribor represents the average interest rates practiced in loans by banks in the Eurozone. It is defined by the European Federation of Banks and is the reference index for various financial products, such as home loans.  

This indicator can be chosen by credit borrowers at various terms, with the most common for mortgage credit being 3, 6, or 12 months. This means that if a client chooses the 3-month Euribor, their credit installment is reviewed quarterly, and if the Euribor is rising, the monthly payment will also increase.

The value of the variable rate is determined by adding the percentage of the Euribor and the spread, another housing credit rate. In essence, the spread is equivalent to the bank's profit margin, and is defined by the customer's risk level, guarantees provided, property value, and additional credit products.

What are the advantages and disadvantages of the variable rate?  

In line with the advantages and disadvantages of fixed-rate, the opposite occurs with variable rate. That is, the main advantage of hiring a variable rate is that, as a rule, the value is lower than a fixed rate.

Whenever the Euribor is low, the variable rate follows suit and can make the monthly installment of a mortgage relatively low. This can allow for more flexibility in the monthly budget, which can be placed in savings.  

But the disadvantage lies in the fact that it offers less stability than the fixed rate, as it can change whenever the installment is reviewed within the chosen period. If the Euribor rises to high values, your installment may increase by several hundred euros. And with these fluctuations, it is not possible to predict how much you will pay for the interest rate on your credit.

Mixed interest rate: Hire both regimes.

There is still an option that you can choose in your credit, which combines the two regimes above: the mixed interest rate. A mixed rate offers a fixed rate for a certain period of time, agreed between the customer and the bank, and after that, the rate becomes variable until the end of the contract.  

It can be a good option for customers who prefer to experience both regimes in an initial phase of life where they do not have the ability to suffer unexpected events with a fixed rate, but in a more advanced stage they will feel comfortable with the unpredictability of the variable rate.

Therefore, the advantages and disadvantages of hiring a mixed rate depend on the time and context in which it is contracted, as it will be difficult to predict how the Euribor will be when switching to a variable rate.

How to choose the right interest rate for my mortgage loan?

The right interest rate for your mortgage depends on many factors, such as your financial profile, the evolution of your income, your preferences and short, medium, and long-term goals, and the European economic context.

Analyze your financial profile, to understand if you are thrifty and usually have a monthly surplus, or if you usually have high expenses and need a lower monthly payment for your mortgage; if your professional life is stable, with or without career progression and income growth expectations; if you can afford a monthly surplus in your budget to support an unexpected rise in interest rates; if you plan to expand your family in the future, or need to save to invest in a business. These are all questions to consider when choosing the rate you want to apply to your credit.

What is the impact of having a fixed or variable rate currently?  

Through a practical example, we will understand the impact of having a fixed or variable rate on a home loan currently.

Let's consider a home loan of 250,000 euros, with a variable interest rate linked to the Euribor at 6 months, a spread of 1.2%, and a maturity period of 30 years.

We will take into account the 6-month Euribor rate in May (effective in July), which is 3.516%. Therefore, the annual nominal interest rate (TAN) for this credit will be 4.716% (spread + benchmark). So, the monthly installment to be paid for this credit will be 1,299 euros.

But if we consider the same credit and the same conditions, with a fixed rate, and an APR of 4%, the installment will be lower. In this case, you would be paying a monthly payment of 1,193.54 euros for your home loan.

In other words, currently, depending on credit conditions, it is generally more beneficial to contract a home loan with a fixed rate than with a variable rate. There are also ongoing campaigns from banks offering mixed rates, with very low fixed rates in the initial period, then transitioning to variable rates.  

However, you must remember that when Euribor rates start to decrease, they will eventually fall to lower values than fixed rates.  

In this process, it is essential to request simulations from several banks to analyze different credit proposals and various interest rate options and other conditions. Because it is a time-consuming and bureaucratic process, you can always hire a credit intermediary to help and assist you, such as Poupança no Minuto (Poupança no Minuto). The service is completely free and involves a financial analysis of your situation and goals, which is then sent to the banks, negotiating the best conditions for you. In the end, they help you compare the proposals and make the best decision for your family.