Banks are always offering the client the alternative between a fixed rate or variable rate for mortgages. But what is the difference between them and what are the advantages of one and the other?
Fixed Interest Rate
The fixed rate, which is less frequently used, allows the client to anticipate with great assertiveness the amount of the loan installments until the end of its term. As the name implies, the rate does not vary, being the same regardless of the conjuncture or fluctuations of the European Central Bank's reference rates (which directly influence Euribor's rate). However, banks tend to protect themselves from a possible rise in these reference rates, which makes it certain that the fixed rates in the early stages of the loan are likely to be higher than the variable rates. In this way the client gets a higher installment, but without worrying about it rising or falling.
Variable Interest Rate
The variable rate is obtainedby adding the spread to the Euribor. Usually, at the time of signing the deed, this combination tends to be lower than fixed rate alternatives. However, since Euribor is variable on a monthly basis, there is a risk that the installment may increase. Currently the Euribor is at historic minimums across all its maturities, but in 2007 it reached as high as 5.5%. Please note that banks provide at the bottom of the European Standardized Information Sheet (ESIS) a simulation of the instalment amount in case Euribor rises. You should consider whether you have the financial capacity to continue paying the instalment in such a scenario.
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