Keys to choosing between a fixed and a variable-rate mortgage
People taking out a mortgage for the first time have lots of questions. Before choosing between a fixed and a variable rate, we recommend reading this.
One of the most common is: fixed or variable?
Given the choice, most people would pick a fixed rate, even though they don't really know the differences between the two. Unfortunately there's no straightforward answer, as it depends on the client's profile.
Differences between Fixed and Variable-Rate Mortgages
- A fixed-rate mortgage is usually more expensive than a variable one, but your repayment always stays the same
- A variable-rate mortgage is cheaper, although if Euribor rises your mortgage will rise too
What matters most when taking out a mortgage isn't so much whether it's fixed or variable.
Factors to consider before choosing between fixed and variable
- The term: some banks put stricter time limits on fixed-rate mortgages, so if you want a 40-year mortgage but the bank only offers 25 years at a fixed rate, you'll need to decide what suits you best.
- Interest rate: some banks offer fixed-rate mortgages at a very high interest rate, making them very unattractive to clients.
- Tie-ins: tie-ins are the additional products the bank makes you take out to reduce your mortgage rate: paying in your salary, life and home insurance, credit and debit cards, pension plans, etc. If getting a good mortgage means taking out lots of these products, weigh up how far it's worth it.
- Mortgage costs: under the new mortgage law, banks pay most of the mortgage costs. But there are real differences between taking out a mortgage with one bank or another. Some charge an arrangement fee and others don't; some banks pay for the valuation and others charge it to the client; and some lenders make you pay several years of life and home insurance upfront, making the transaction substantially more expensive.
- Loan-to-value: if you need more than 80% financing but your bank only offers a fixed rate up to 80% of the purchase price, you'll need to choose whether to put in more capital or take a variable-rate mortgage.
Mixed-rate mortgages versus fixed and variable
In recent years some lenders have added mixed-rate mortgages to their range.
A mixed-rate mortgage is one where part is at a fixed rate and part at a variable rate. ING has a mixed-rate mortgage of up to 40 years in which the first 10 years are fixed.
One of the benefits of a mixed-rate mortgage is that it gives you the peace of mind of a fixed rate in the first years.
During those years you'll have the same repayment and can save to make overpayments and reduce the debt before it becomes variable.
If you've taken out a mortgage to buy an investment property, a mixed-rate mortgage may give you greater security.
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Conclusions
The best way to decide whether a fixed or variable rate suits you is to study and compare the options available for your profile. Get offers from different banks and negotiate the terms with each of them personally to get the best conditions.
Once you have all the real options to study, compare the particular terms of each thoroughly to find the mortgage that suits you best. And one thing is certain: a fixed-rate mortgage gives much more peace of mind than a variable one.
Knowing in advance what you'll pay over the life of the mortgage lets you plan your finances ahead and avoid surprises.
A fixed-rate mortgage also lets you save more and repay your mortgage early.
Most banks no longer charge partial or full early repayment fees, encouraging clients to pay off their mortgages early.
If you'd like our advisor to tell you whether a fixed or variable rate suits you best, just request your free financial advice
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