Is a fixed or variable rate mortgage better?
The dilemma between fixed or variable rates is perhaps the most common when it comes to mortgages . Anyone who has found himself in the position of having to open a mortgage will in fact have asked himself this question, and innumerable are the theories developed in this regard.
The real news is that the Italians seem to have taken a clear direction in their decisions, at least in this period. The fixed rate mortgage seems to lord it over the variable.
The choice between fixed or variable rate in 2018
So let’s see what is happening in these months, what are the Italians’ choices between fixed or variable rate mortgages . As we have mentioned, the fixed rate seems to prevail, with unsuspected values until a few years ago (according to some estimates, the percentage in favor of the fixed rate on the variable would be around 80%). This phenomenon would affect not only new mortgages, but also subrogations. What is the reason for this strong imbalance in favor of the fixed rate? Is it really cheaper than the variable?
The fixed rate has outperformed the variable: why?
From a careful analysis of the macroeconomic, political and, not least, the specific mortgage market, the motivations at the root of this choice can be traced back to two strands: a more objective and logical, acceptable, a much more emotional one and, for certain aspects, questionable. This does not mean that the fixed rate option with respect to the variable is to be condemned, far from it. Let’s see in detail then what are the reasons that lean towards the fixed rate the mortgage market.
The choice of the fixed with respect to the variable: rational motivations
At this time the official rates (the ECB rate and, consequently, the Euribor and Eurirs) are at historic lows – for example, the Euribor has been in negative territory for quite some time. Even if, as we shall see, there are no rapid rates to rise, it is common opinion that, given the current values, these can only go up again in the medium to long term, and the duration of the loans, as we know, can also be very high.
Furthermore, the spread applied by the banks for fixed-rate mortgages at this stage is particularly limited. As we know, fixed-rate mortgages at an early stage have higher interests than the variable , as the certainty of the installment must be paid, which for the fixed-rate mortgage will be constant over time. In this period the range is particularly low, according to some observers because in this way the banks want to acquire customers on the fixed rate and therefore retain them for a long period (when rates rise, it will be practically impossible to find a cheaper mortgage).
It should not be surprising, therefore, that the choice of many Italians, while also being the most convenient variable in this period, falls on the fixed rate : official rates will only increase (and when no fixed-rate mortgage will happen it will be more convenient), and initial difference with the variable is reduced: why risk it?
The choice of the fixed with respect to the variable: emotionality
But there are also other reasons behind the choices of this period, and concern skepticism, not to say concern, about the particular economic and political situation of our country.
On the one hand we have emerged from a recent recession but we are still not facing a decisive recovery in the economy. Indeed, according to some, a new period of difficulty for the Italian and European economy in general cannot be completely ruled out.
Furthermore, the rise in the BTP / Bund spread is a cause of great concern and is at the center of the political debate. Many associate it with another period of crisis a few years ago, that led to the Monti government.
The tendency therefore is generally to reduce the risk, and for those who must open a mortgage, this translates into the choice of the fixed rate, and not of the variable.
On these points, however, it is appropriate to clarify:
- The BTP / Bund spread has a relative impact on the Euribor, which is the main rate used to index the interest on variable-rate loans. It is in fact a “European” index (the rate applied by the main European banks in loans between them) that is not directly affected by the events of our house
- The slow recovery of the economy actually favors a containment of rates, therefore those who are about to open a variable rate mortgage should be more concerned about a possible decisive recovery in the economy itself
We therefore record greater caution in decisions, due more to widespread emotion than to rational elements.
Also read: What is the Euribor and how is it calculated
At this point is the fixed rate really worth?
At this point, we cannot remember the advice that always mr. Bank feels like giving. The question of whether the fixed rate or the variable is better should not be asked in absolute terms, but in relation to the duration of the loan to be opened. The variable rate will be all the more risky the longer the duration of the loan. Furthermore, increases in rates in the first few years will be more damaging than those that may occur in the final phase of the amortization period.
- The fixed rate right now is particularly convenient, and probably, if you are oriented towards this solution, this could be the best time to subscribe to it
- The variable rate at the start (ie if we look at the first installments) is always cheaper than the fixed rate, but the rates are destined to rise again. Initially, this recovery should be slow, so it could still be a valid solution for mortgages that are not too long
- In general, the time for mortgages is extremely favorable . If you are not a risk lover, “settling for the fixed” to be sure of the installment for the entire duration of the loan seems to be a very attractive road, and this is in short the choice that the Italians are making.