Which interest rate for your mortgage?
The answer depends on several parameters specific to your personal circumstances. Nevertheless, here are several factors to help you make the right choice before taking out a mortgage from your bank.
Fixed rate: security and less flexibility
This formula guarantees you a certain peace of mind. You benefit from a rate that will not change from the beginning to the end of your loan, even if the market registers major fluctuations. You know in advance the amount of all your monthly payments, and are protected from any unpleasant surprises.
On the other hand, the amount paid under a fixed rate is generally higher than that of variable rates, and you will not be able to make changes to the predefined repayment plan. It will be impossible for you to make early partial repayments. Only full repayment is allowed, and is subject to the payment of penalty fees.
Generally, a fixed rate is a good option when interest rates are low – as is currently the case – and you borrow over a long period. You benefit from an advantageous rate for the whole duration of your loan.
Variable rate: a controlled risk
Every year variable rates, and therefore your monthly payments, increase or decrease according to the changes in the rates at which banks are financed (the benchmark index is generally the Euribor or the interbank rate in euro).
Besides the fact that these are generally lower than fixed rates at the beginning, variable rates have the advantage of being more flexible. You can make early repayments without charge and thus shorten the mortgage end date or reduce your monthly payments. If you are building or converting a property, your bank makes the funds available as the work progresses. The interest to be paid is only due on the part of the loan used, and you avoid paying unnecessary interest on unused funds.
The main drawback with variable rates is their lack of transparency making it impossible for you to forecast what you will have to pay in monthly instalments in the years to come and for how long.
Generally, variable rates are the best choice when interest rates are high and if flexibility is the most important criteria for you, either because you are self-employed or your income is not constant, or because your financial and professional circumstances are set to change in the future.
And why not a revisable fixed rate?
If you are finding it difficult to choose, there remains a third option: a revisable fixed rate. You keep a fixed rate for a determined period (generally 3, 5 or 10 years), and at the end of each period, you decide whether to continue with a fixed rate or to change for variable rates until the end of the following period and so on.
The advantage of this rate is that it combines the security of the fixed rate with the flexibility of variable rates. You enjoy protection during the early part of your contract, when the interest due is higher, and at the end of each period, you can take advantage of any market opportunities: either you opt for variable rates if interest rates are trending upwards at the end of the term, or you keep the fixed rate if the opposite is happening. In addition, at the end of each period, you can change the type of rate and/or make early repayments on your loan (fully or partially) without incurring additional charges.
That being said, be aware that the revisable fixed rate may prove to be higher or lower than variable rates or a fixed rate depending on the period in which it is chosen, and that there remains a risk. The type of rate chosen at the end of each renewal period will be the one in force on maturity. There is no guarantee that in the next few years, rates, whether fixed or variable, will remain as low as they are now.
A word of advice: before making your decision, take some time to think and don’t hesitate to speak to your banker about it.
For more information, see www.ing.lu/immo or visit our agency.
Often you hear people say: “Anyway, until I have paid off my home loan it’s the bank who owns my house”. But is it true?
It is always the same question that every one of us is asking before signing a home loan with his bank. To gain a more objective overview, let’s analyse them one by one with their respective advantages and disadvantages.
The rate remains fixed for a pre-defined period and, at the end of the period, is subject to a revision. The pre-defined period can vary from one bank to another but is generally 3, 5 or 10 years.