Fixed or variable rate: which one for your home loan

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.  

Fixed interest loan

As the name suggests, the fixed interest rate is fixed when you sign the loan contract and will remain unchanged during the entire term of your loan. 

What are the advantages? 

A fixed rate means security and transparency

The amount of your monthly payments remains unchanged during the entire term of your loan. You know in advance the costs of your loan and you will never have any unpleasant surprise. Even if the market is subject to important fluctuations, the terms and conditions of your loan won’t change.

The fixed rate is more adapted when rates are low and can only rise in the upcoming years. 

Several specialists agree to say that this is the case now. Rates are so low that they couldn’t be expected to always remain low. If it is true, this is beneficial for those who have chosen a fixed rate. 

What are the disadvantages?

You are not allowed to make partial early repayments

Only repayment in full is allowed but subject to a penalty payment. Take it into account if you want to resell your property before the end of the term of your loan. 

The fixed rate is the highest

The fixed rate is higher than the variable rate. 

The fixed rate is less adapted if the rates decrease in the upcoming years

 If the tendency is the decrease in rates when you have taken out your loan sooner, you will pay too much interest compared to the market conditions. Your rate loan will be maintained, even if it is disadvantageous for you.

Variable rate loan

The variable rate home loan is revised each year on the basis of a benchmark index, Euribor. Your monthly payments therefore increase or decrease depending on changes in these rates. 

What are the advantages?

With a variable rate home loan, early repayments are authorized

You can make additional repayments or even repay it in full without incurring any penalty payment at all. You can therefore shorten the term or decrease the monthly payment of your credit depending on your financial means.

The variable rate is the lowest

At the beginning, the variable rate loan is lower than the fixed rate loan.

The variable rate offers a better flexibility if you build or convert a building

In that case, your bank makes the amount of credit available to you as the works progress. This saves you from paying unnecessarily funds not actually used. 

What are the disadvantages?

The variable rate presents a potential risk

You expose yourself to an increase in rates and in the cost of your credit. Even if the banks offer today a great range of variable rates with caps, an increase in rates can have a negative impact on your budget if you are not prepared to this eventuality. 

The variable rate offers less transparency

Opting for a variable rate loan is a speculative choice. You can’t anticipate what you will monthly pay in the upcoming years and how long.

Finally, which one will you choose?

The answer is difficult and depends on several parameters specific to your personal situation.

To make it simple, the fixed rate is better for you if you borrow on a long term (more than 15 years) because it offers security. If, on the short term, a high increase or decrease in rates seems unlikely, nobody can anticipate their evolution on the long term (increase of your incomes, need for other financings, etc.)

On the other hand, variable rate is better for you if flexibility is for you the most important criterion because your financial and professional situation will evolve in the next years.

If you can’t choose between these two types of rate, there is a third option: the reviewable fixed rate.  

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