Fixed-rate, variable-rate and mixed-rate mortgages: definitions and differences
There is a mortgage rate for each borrower profile. If you are looking to arrange a mortgage, you should look for one that best suits your needs and your savings capacity. The main difference between a fixed-rate mortgage, a variable-rate mortgage and a mixed-rate mortgage is the way we pay off the loan, although they also come with different financial terms and conditions. If we are torn between these options, we should focus on three aspects: the interest rate, the term and the repayments.
Let's take a closer look at what each type of mortgage is all about:
With a fixed-rate mortgage, the interest rate does not change. It is therefore fixed over the life of the mortgage. Many of us find it reassuring to know that we will always be paying the same amount; that we can continue to rely on this fixed expense when planning our finances, and that there will be no unpleasant surprises when the benchmark index rises. However, the repayment period for fixed-rate mortgages is usually shorter, meaning the repayments are usually higher.
With a variable-rate mortgage, the interest rate is determined by the benchmark rate (Euribor), plus a fixed spread. This means that repayments may increase or decrease depending on the benchmark index. Typically the interest rate is updated every six months. However, the repayment term is usually longer, making for lower instalments.
Last but not least, we have amixed-rate mortgage, which is effectively a combination of the previous two types. The borrower pays a monthly instalment at a fixed rate over the first few years, before switching to a variable rate. It is important to know that during the first year of a variable-rate mortgage (and sometimes a bit longer), you actually pay a fixed interest rate. Once that initial period has ended, you will pay the benchmark rate plus the spread.
In conclusion, it is fair to say that when deciding on the right type of mortgage, we need to evaluate our savings capacity and our personal circumstances and, above all, choose between the security of always paying the same and in less time, or paying a smaller instalment, albeit at a floating rate. In any case, we strongly advise you to weigh up the pros and cons of each type of mortgage by running them through a mortgage simulator (there are simulators for both fixed- and variable-rate mortgages), and always be sure to read the fine print.
What does mortgage prepayment mean?
Mortgage prepayment essentially means paying off our mortgage in advance. This allows us to reduce the amount we owe, or the number of years over which we will be repaying it. Repaying the full amount of the outstanding principal and therefore settling our debt is known as full repayment, while repaying part of the debt is known as partial repayment.
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.
Is it possible to lower the interest payable on our mortgage?
Yes, absolutely, and this can be achieved in various ways. The most common way is arranging other products "linked" to our mortgage (our payroll, a credit card, home and life insurance, etc.). 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-rate mortgage. Our earnings are also relevant: the more we earn, the more we can reduce the rate.