The interest rate on a mortgage is one of the most important factors you need to consider when applying for a loan to buy a home. With the ever-changing economic landscape, it is essential to understand how this interest rate is decided and how it affects your finances. This article combines current trends and forecasts for 2025, explaining the differences between fixed-rate, variable-rate and mixed-rate mortgages and how interest rates impact both current and future mortgages.What is the interest rate on a mortgage?
The interest rate on a mortgage is the percentage paid on the money borrowed. This interest is applied to the mortgage capital and determines the total amount to be repaid, directly affecting the monthly payments .
There are three types of mortgages on the market depending on the interest rate:
• Fixed-rate mortgage : Interest remains constant throughout the life of the loan. It offers stability, as the payments do not change over time, which makes financial planning easier. However, they usually have a higher initial interest rate than variable-rate mortgages.
• Variable rate mortgage : The interest rate fluctuates based on a reference index, usually the Euribor. Every 6 or 12 months it is reviewed and, if the Euribor has risen or fallen, the mortgage payment is adjusted. They are more attractive when interest rates are low, but they involve greater risk in the long term.
• Mixed mortgage : Combines an initial fixed-rate period, usually between 2 and 10 years, followed by a variable-rate period. It offers a mix of stability and flexibility, allowing you to take advantage of favourable conditions over time.
How is the interest rate decided?
The interest rate on a mortgage is influenced by two factors: the overall economy and your personal preferences .
1. Evolution of official interest rates: Central banks, such as the European Central Bank (ECB) , set the reference interest rates, which determine the cost of money. When central banks raise interest rates, mortgages become more expensive, both for mortgages already signed and for new ones.
2. Personal preferences : If you prefer stability and predictability, a fixed-rate mortgage may be the best option. However, if you are willing to take the risk of the Euribor rising or falling, a variable-rate mortgage may be more attractive to you.
H2: Are insurance mandatory when taking out a mortgage?
There is only one mortgage insurance that is required by law for all mortgaged properties: insurance against damage and fire. This is established in article 8 of Law 1/1981 regulating the mortgage market and Royal Decree 716/2009.
This insurance is usually included in home insurance as one of its coverages, hence the false belief that it is obligatory to take out home insurance with the mortgage. Nothing could be further from the truth.
In fact, although this insurance is mandatory, no entity can force you to take out its own in order to offer you the mortgage. The 2019 mortgage law allows you to take out similar insurance on your own and present it so that you can be granted the mortgage.
Although not mandatory, many mortgage insurance policies are useful. Home insurance will cover the home beyond fire damage, while life insurance gives you peace of mind that the home will be paid for and that your loved ones will have somewhere to live if something happens to you.
Evolution of interest rates in 2023 and 2024
Interest rates have been in the spotlight in recent years due to central banks' actions to control inflation . During 2023, the ECB raised the official interest rate to above 4%, leading to an increase in variable-rate mortgages .
With the Euribor rising, many families with variable mortgages saw a considerable increase in their monthly payments. For those with a 180,000 euro mortgage over 25 years, monthly payments could increase by more than 300 euros .
As we move towards 2025, experts predict a gradual stabilisation of interest rates, especially if inflation is brought under control and central bank measures take effect. This stabilisation could slow the rise in mortgage prices, making variable-rate mortgages an attractive option again.
How do interest rates affect your mortgage?
Interest rates impact both existing and new mortgages:
• Variable rate mortgages : Changes in the Euribor directly affect the monthly payments on variable rate mortgages. If the Euribor rises, your monthly payments will increase at the next review. This makes variable rate mortgages less predictable, but they can be cheaper when rates are low.
• Fixed-rate mortgages : While fixed-rate mortgages offer stability, they are also affected by general interest rates. When the ECB raises rates, the fixed-rate mortgages on offer will become more expensive.
What can we expect for 2025?
With interest rates expected to stabilise by 2025, we could see a slight reduction in variable rate mortgages as the Euribor moderates. Mixed mortgages will also remain a popular option for those seeking short-term security and long-term flexibility.
Furthermore, green mortgages are likely to continue to gain ground, offering more favourable terms for those purchasing sustainable homes, which fits with sustainability trends in the real estate market.