Buying a home is probably one of the most important investments in the lives of most citizens. It is a process that can be extended in time and that forces you to make important decisions, such as choosing the area of residence and the ideal home. As for financing, choosing between a fixed rate or a variable rate mortgage is another question that generates more headaches before purchasing a property.
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The truth is that choosing between one or the other mortgage depends fundamentally on the personal circumstances of each one. There are those who prefer to assume a higher rate in exchange for knowing with certainty what they will pay each month, regardless of what happens with the economic situation, and there are those who choose to benefit from market fluctuations.
In any case, the truth is that in recent years fixed-rate mortgages have gained ground in the market. In 2009 they accounted for less than 3% of all mortgages that were signed each month and today they are close to 50%. According to the latest data published by the National Institute of Statistics (INE), in September 2020 26,878 mortgages were constituted on homes, 18.4% more than in the same month of 2019. 51.5% of these mortgages were constituted variable rate and 48.5% fixed rate.
In addition, during the second quarter of 2020, they even surpassed variable rate mortgages in percentage, mainly due to the strong increase experienced by the Euribor, the index to which almost all variable mortgages in Spain are referenced, at the beginning of the COVID-19 pandemic.
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This index marks the rate that banks charge to lend money to each other. Hence, it tends to rise when a crisis occurs that increases risk and, instead, falls when central banks take measures to stop a possible recession.
This is precisely why the indicator climbed rapidly in March, April and May and began to decline dramatically since June, when the European Central Bank (ECB) injected liquidity into the market to ease the tensions caused by the health crisis. In November, the Euribor closed at -0.481%, which is its sixth consecutive fall and its fourth all-time low in a row so far this year.
Citizens who currently have a variable rate mortgage are greatly benefiting from this situation. They will see how their mortgage payments are significantly lightened these months. However, it is important to bear in mind that the situation, even if it lasts in time, will not last forever and the rates, sooner or later, will rise again.
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With this in mind, is it time to sign a fixed rate or variable rate mortgage? Each of them has its advantages. Mortgages usually last for long periods of time. Hence, the variables, being subject to market variations, offer various periods of cheaper installments throughout the life of a loan. In addition, the usual term is 20 to 30 years, extendable up to 40 years. They do not include commissions for interest rate risk and do not usually oblige the contracting of many other products, such as life and home insurance.
Fixed-rate mortgages offer stability in installments and usually have shorter repayment terms
For their part, fixed mortgages offer stability in the installments, which do not vary throughout the life of the loan. In addition, they tend to have shorter repayment terms, although they bear more commissions and interest than in the case of variables. This type of mortgage allows clients to perfectly plan their future payments and, with it, improve their personal finances. There are also mixed mortgages, which combine fixed interest during the first years with variable interest in the last stage of payment.
Calculator: Find out if you are more interested in a fixed or variable rate mortgage
As the INE figures show, it seems that citizens nowadays prefer to opt for security. It should not be forgotten that the economic situation is still very delicate and that many people are still afraid of losing their jobs. In the first nine months of 2020, more than 119,400 fixed-rate mortgages were formalized, more than those formalized in all of 2017 and twice as many as in 2016.
Is it a good time to buy?
In both cases, what is convenient is to analyze the purchase process well, seek advice to be sure and know in depth the steps that must be taken to formalize the operation. COVID-19 has strongly shaken the real estate market, but this is not proving to be one of the most affected sectors. In addition, experts agree when stating that it has much more solid foundations than in the previous crisis of 2008 that make it more prepared to face the blows.
Anna Gener, CEO of Savills Aguirre Barcelona, talks on the Banco Sabadell Podcast about the changes and opportunities that housing offers after the health crisis. He recognizes that there is now some paralysis in the sector and believes that the return to the commercialization rhythm that existed before the outbreak of the pandemic will depend on the economic situation, which directly influences the security that citizens feel regarding their income, and the conditions of mortgage loans.
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