Choosing between a fixed, variable or mixed mortgage is one of the main headaches when looking for financing to purchase a property.
The memory of interest rate hikes during the economic crisis is still fresh in the minds of customers, many of whom want to avoid a similar scenario at all costs.
On the other hand, the uncertainty about the future evolution of the Euribor, currently in negative territory, as well as the different contractual conditions established by the banks, contribute to making the decision more difficult.
This guide is designed to help you understand the differences between a fixed-rate, variable-rate or mixed-rate mortgage, and to make an informed choice regarding the type of mortgage that best suits your needs and preferences.
Advantages and disadvantages of variable mortgages
Variable-rate mortgages make up 63% of mortgage loans signed in Spain, according to INE data. Traditionally, it has been the most popular option for customers. These are its main advantages:
Longer repayment terms
As a general rule, these mortgages are usually offered with repayment periods of up to 30 years. In addition, exceptionally, and provided that the client does not exceed 70 years of age before the contract expires, some entities grant variable-rate mortgages of up to 40 years.
However, it should be noted that the longer the repayment period, the longer you will continue to pay interest, which will mean that the total cost of your mortgage will also be higher.
Lower monthly fee, at least in the short term
The fact that the Euribor is at historic lows and the spreads set by banks are quite low means that the amount of monthly payments is lower than that of fixed-rate mortgages.
According to INE figures, the average initial interest rate for these mortgages is around 2.48%.
Variable rate mortgages also have some drawbacks:
Variability of the rates
One drawback of these mortgages is the uncertainty of the amount of the installments, which depends on the reference index, normally Euribor.
Following the sharp decline in this index in recent years, some sources indicate that the Euribor is likely to see a gradual recovery. We will give you more details in the next section.
Long-term price increase
As we warned a few paragraphs ago, the extension of the repayment periods also means that the final cost of the loan becomes more expensive. For this reason, it is advisable to adjust the amount of the instalments, reducing the term of the mortgage to a reasonable limit.
Advantages and disadvantages of fixed-rate mortgages
According to data provided by the INE, fixed-rate mortgages already account for 37% of the market. The advantages of this type of loan are as follows:
Stable quotas
This mortgage loan is characterized by the application of a fixed interest rate, so the monthly payment will always be the same.
From the beginning and throughout the life of the contract, you will always pay the same amount month after month. This undoubtedly provides great peace of mind for the future.
Better financial management
Knowing the exact amount of your payments makes it much easier to estimate your expenses and therefore better manage your personal finances.
Competitive conditions
Fixed-rate mortgage interest rates are becoming increasingly competitive, and some institutions are even extending the maximum repayment periods to 30 years. These measures are leading to a considerable increase in the competitiveness of this type of mortgage.
As regards the disadvantages of fixed-rate mortgages, the following are worth mentioning:
Higher rates, at least in the short term
These mortgages tend to have somewhat shorter repayment periods. In addition, the fixed interest rates offered by the sector are somewhat higher than the rate we would pay with a variable-rate mortgage. The combination of these two elements makes the monthly payments somewhat higher.
Early cancellation compensation
Sometimes, these mortgage contracts include a fee to protect against possible financial loss that could result from the early cancellation of the mortgage by the client.
Advantages and disadvantages of mixed mortgages
As their name suggests, mixed mortgages are characterized by combining an initial period with a fixed rate, followed by a period governed by variable interest. We will now tell you what their main advantages are:
Fixed interest rate decision-making capacity
As a general rule, the client can decide the period during which he will be paying a fixed interest rate. In this regard, banks offer terms of 5, 10, 15 and even 20 years. However, the latter case would mean, de facto, taking out a mortgage with a fixed interest rate for most of the life of the contract.
Competitive interest rates
In order to encourage the taking out of these mortgages, banks are offering a combination of fixed interest rates and very competitive variable interest rate spreads.
We now move on to mention its main drawback:
Not being able to benefit from the current reduced Euribor
The biggest drawback of mixed mortgages is that the period subject to fixed interest is always the initial one, so it is not possible to benefit from the current situation with a Euribor at historic lows.
What is more interesting: fixed, variable or mixed mortgage?
Now that you are clear about the differences between the different types of mortgages, it is time to decide which one is best for you.
As we indicated at the beginning, the choice depends mainly on your financial situation, as well as the preferences you have regarding the payment of your mortgage loan.