Based on the interest rate, a mortgage loan can be classified as a fixed-rate mortgage or a variable-rate mortgage. This latter loan modality, the variable-rate mortgage, is the most chosen in Spain and corresponds to an amount of fees that will be modified with the periodicity established in the contract (usually semi-annually) based on a reference index, usually the Euribor.
Usually, the amount of the calculated fee will be constant (French or constant fee method) until the next interest rate review. This fee is composed of a part that goes toward amortizing the principal of the granted loan, and the remaining part which is the interest paid to the lender.
What is a variable-rate mortgage?
A variable-rate mortgage is based on a reference index, which conditions the fluctuations of the fees.
The variable-rate is reviewed periodically and determines the amount of the following fees until the next review, based on that reference index. The financial calculation method for the new fee is the same, constant fee (or French method), and it will also have a part to pay interest and another to amortize part of the loan principal. In the first years of a loan calculated by this method, the part that goes toward paying interest is much larger than the part that amortizes the principal. This tendency reverses as the years go by.
In this way, the fee can go up or down depending on the interest rate set by the reference index at that time.
Advantages of contracting a variable-rate mortgage
The variable-rate mortgage has been preferred among Spanish buyers because of the many advantages it offers:
- Interest rates are usually lower than fixed-rate mortgages.
- They are often associated with long amortization periods.
- The associated commissions are also low.
Risks associated with variable-rate mortgages
The attractive advantages of variable-rate mortgages are based on an existing risk condition. This is because the reference index can fluctuate in a somewhat unforeseen way, which can mean a significant change in the mortgage fee for the following period until the next review.
This is precisely what has happened with the most widely used reference index in mortgages, the Euribor, which since 2012 remained below 1% and was even negative from 2016 to 2022, but currently stands between 2% and 3%.
Comparison between fixed-rate and variable-rate mortgages
The two classic types of mortgages are those with fixed-rate or variable-rate. The differences between them will help you identify which one suits you best or which you prefer to choose for your mortgage loan:
- Fee and interest: In most cases, the fees of a fixed interest mortgage are higher, as are the associated interest rates.
- Commissions: A greater presence and amount of commissions is also identified for fixed-rate mortgages than for variable ones.
- Stability: A fixed-rate mortgage keeps its fee invariable, which provides total stability, as you will know what you have to pay throughout the entire loan, from beginning to end. This does not happen with variable-rate mortgages, which modify their fee after each review.
- Amortization period: variable-rate mortgages usually have a longer amortization period associated with them.
Tips for choosing the best variable-rate mortgage
Usually, fixed-rate mortgages lead to higher fees but offer lower risk and greater stability to clients, since they are not determined by fluctuations in the index.
In contrast, variable-rate mortgages are more attractive in terms of their interest, but the risk assumed is greater.
It is important to analyze your personal situation and, above all, the level of risk you are willing to assume to choose the best option in each case.
Frequently asked questions about variable-rate mortgages
Can I change to a fixed type during the life of the mortgage?
There are different methodologies to change the mortgage modality to a fixed type. Mortgage novation (negotiation with the entity) and mortgage subrogation (changing the mortgage bank) are usually the two most used. It is also possible to cancel and contract a new mortgage that adjusts its modality to your interests. In any case, one must be attentive to the commissions implicit in these changes.
What happens if interest rates go up after contracting the mortgage?
In a variable-rate mortgage, interest rates are conditioned by the reference index and, indeed, can go up or down after each periodic review. In the event that they go up, the installment you will have to assume during that period will be higher.
How much can the monthly fee vary in a variable-rate mortgage?
Despite a mortgage being at a variable-rate, some financial entities do set maximum limits in order to protect consumers. Nonetheless, these are difficult to reach, as the variations in the reference index are usually very contained.
Are there variable mortgages without an annual interest review?
All variable-rate mortgages associate a periodic review of their interest rate, but not all of them do so annually.
Some modalities apply this review on a semi-annual, quarterly, or other periodic basis.