The type of interest rate is a fundamental parameter to take into consideration when choosing the best mortgage for your needs.
It is a value that directly affects the amount of the installment : the interest, calculated as a percentage and on an annual basis, is the amount that is paid for the loan of a capital. It is therefore an essential element, because it determines the cost of the mortgage .
There are different types of interest rates, but the main difference is between fixed and variable rates . The fixed rate is calculated based on the Eurirs (Euro Interest Rate Swap), while the variable rate is calculated based on the Euribor (Euro Interbank Offered Rate). To these reference parameters is added the spread , ie the cost that the bank applies to the money disbursed. The sum of these two parameters is the actual interest rate.
THE DIFFERENT TYPES OF INTEREST RATES
Based on the interest rate applied, we can divide the mortgages into:
- Fixed rate mortgage
- Variable rate mortgage
- Variable rate mortgage with CAP
- Mixed rate mortgage .
The fixed rate mortgage allows you to establish the amount of the installment at the time of signing the contract and keep it unchanged for the entire duration of the loan. However, the security of the fixed rate entails, for the same amount and duration of the loan, a slightly higher basic cost than that of the variable rate loan. For these reasons, the fixed rate mortgage is suitable for those who want to plan their expenses with certainty and tranquility and for those who have a constant income.
The variable rate mortgage , on the other hand, is based on the Euribor rate at 1, 3 or 6 months, depending on the type of installment chosen. The interest rate is not locked, but follows the market trend: the installment may consequently change, downwards or upwards, during the amortization of the loan . Due to these characteristics, the variable rate mortgage is suitable for those who have a certain propensity for risk and a medium-high income that allows them to support any increases in the installment.
LOAN INTEREST RATES: OTHER SOLUTIONS
As mentioned, the fixed-rate mortgage and the variable-rate mortgage represent the most common types of mortgage. However, there are alternatives.
An example is the mixed rate mortgage , which allows you to change the type of rate, from fixed to variable or vice versa, according to the deadlines established in the loan agreement . The rate change option, however, has a cost and usually this type of mortgage provides a greater spread than the others.
Then there is the constant rate: this is a variable rate mortgage with effects on the duration of the amortization plan. If the Euribor falls, the duration of the loan decreases, while in the event of an increase in the Euribor, the duration increases accordingly. In both cases the installment remains unchanged.
The variable rate with CAP , on the other hand, is a variable rate with a maximum ceiling established in the loan agreement: if the Euribor rises above this threshold, the installment will not be changed.