What is the better option?
There is no easy answer to this question since both options have their pro and cons. It depends on your individual situation and preferences whether a fixed or a variable interest rate is the right choice for you. In this article we will explain the most important differences and tell you what you should pay attention to.
Only in the future will we know what would have been the best option. Because of this, this simple rule of thumb applies: In case of doubt, diversify. Often, banks offer a mix of a fixed period (25 years) and a variable period (five years) for a loan term of 30 years.
This graph of the euro and the US dollar base rates shows how fast the interest rate levels can change.
The Most Important Facts at a Glance
Fixed Interest Rate |
Variable Interest Rate |
|
stays the same over a set period of time |
can change on a regular basis |
|
security and predictability |
flexibility |
|
overpaying on mortgage by €10,000 – €50,000 free of fees possible every 12 months |
overpaying on mortgage free of fees possible almost always |
|
positive: if future interest rates rise above the fixed interest rate |
positive: if future interest rates fall |
Fixed Interest Rate
Fixed rate interest offers a fixed interest percentage that borrowers pay back over an agreed period of the loan. This makes budgeting easier and is an advantage for borrowers who value security and predictability in their loans. If the loan term is longer than the fixed rate period, a variable interest rate is agreed on for the remaining loan term.
A drawback of fixed interest rates is that this option is less flexible when it comes to overpaying on your mortgage. In most cases, you and the bank will negotiate a certain overpayment allowance that may be used every 12 months, usually €10,000-€50,000.
If you overpay more than that, you can be charged a fee. This fee is also called Early Repayment Charge (ERC) and amounts to a maximum of 1% of the amount that exceeds the overpayment allowance.
Variable Interest Rate
Variable interest rates can frequently change. This may deter borrowers who are less prone to take risks. If you want a variable interest rate for your mortgage, you need to prove that you’re able to afford the monthly instalments even when interests rates rise. If your monthly cash flow is sufficient, you can choose a variable interest rate.
An advantage of variable interest rates is their flexibility. In most cases, you will not be charged for overpaying on your mortgage, so you can simply transfer money to your credit account whenever you want. In some cases, however, you need the notify the bank six months before if you want to pay off the whole loan before the original final repayment date.
A variable interest rate consists of a benchmark interest rate + add-on interest. This surcharge is also called margin. Usually, the EURIBOR is used as a benchmark, more specifically the 3-month-EURIBOR or the 12-month EURIBOR. In rare cases, other EURIBOR rates are used.
