The biggest difference between fixed-rate mortgages, variable-rate mortgages and mixed mortgages is mainly in the way we pay the mortgage. This difference also means different financial conditions. If we are torn between these options, we should focus on three aspects: the interest rate, the term and the repayments.
With fixed-rate mortgages, the interest rate is the same throughout the life of the mortgage. This is handy for us, as we know what our repayments will be and we won't get any nasty surprises if the benchmark (usually the Euribor) rises. However, the repayment period for fixed-rate mortgages is usually shorter, meaning the repayments are usually higher.
With variable-rate mortgages, the interest rate depends on the benchmark index and a fixed spread. This means that repayments may increase or decrease depending on the benchmark index. The interest rate is usually updated every six months. However, the repayment term of variable-rate mortgages is usually longer, meaning smaller repayments.
Mixed mortgages combines a fixed-rate monthly repayment for the first few years, with the remainder at a variable rate. During the first year, approximately, variable-rate mortgages also have fixed exit interest, after which the benchmark index is combined with the spread.
When choosing a mortgage, we need to consider our saving capacity, our personal circumstances and, above all, whether we prefer the security of always paying the same, over less time, or smaller repayments that are subject to changes in the Euribor. We recommend you weigh up the pros and cons of each type of mortgage using a mortgage simulator (there are simulators for both fixed- and variable-rate mortgages), and always read the fine print.
Can we reduce the interest on our mortgage?
Yes. Once we have arranged our mortgage, there are a number of ways we can reduce the interest. These include arranging products in combination with the mortgage, such as direct deposit of our salary, credit cards, and home and life insurance). The percentage of the appraisal value of our home also influences the interest we pay (the higher the percentage, the higher the spread), whether we have chosen a fixed-rate, variable-rate or mixed mortgage. The same happens with our salary, in all three cases: the higher our salary, the less we pay.
Variable-rate mortgages usually have longer repayment terms than fixed mortgages. We are talking about 40 years for the former, compared to 30 years for the latter.
Paying off your mortgage and repaying some of it ahead of plan is strongly recommended, but be careful! The bank can charge early repayment fees: the withdrawal fee during the first five years, in the case of variable-rate mortgages; and interest rate risk fee for fixed-rate mortgages.
Our bank or financial institution will allow us to change from one option to another if we have already arranged a mortgage.