Mortgage loan: fixed rate or variable rate, how to choose?

Among the countless questions that a borrower asks himself before subscribing to a mortgage, comes that of the fixed rate loan versus the variable rate loan.

If the two are synonymous with bank interest payable, their amount will not be the same and the choice must be considered according to your project.

So what is the fixed rate? What is the adjustable rate? What choice to make between the two possibilities? We take stock!

The fixed rate is valid throughout the duration of the loan

The fixed rate is the star of mortgage loans. The majority of home loans granted in France over the past 20 years are at a fixed rate. The latter has the advantage for the borrower of knowing exactly where he is going and always paying the same monthly payments, whatever the economic context of the moment. If it has the favor of real estate buyers, it is because it protects against any possible rise in rates, but not only that. Indeed, the fixed interest rate constitutes an essential basis for negotiation with the bank, easy to understand and understand. In other words, the lower the fixed rate granted, the lower the loan maturities.

However, you should know that the negotiation is not unlimited, because the interest rate set by banking institutions is greatly influenced by the key rate of the ECB (European Central Bank), but also by the rate of inflation. In a way, it reflects the economic situation of a territory at a given moment. What then causes the fixed rate to vary from one borrower profile to another is the quality of his file: personal and professional situation, amount of personal contribution, household income, borrowing capacity, financial guarantees, etc.). The length of the loan will also have an influence, since banks have higher interest rates when the loan is long.

The variable rate changes during the life of the loan

As its name suggests, the variable rate varies … We also speak of a revisable rate, since the banking establishment can revise the conditions according to the loan contract signed between the parties. Therefore, we understand that this type of rate is less chosen by borrowers, who are more particular, since they leave uncertainty on the amount of future monthly payments. Concretely, the variable rate is revised downwards (good news) or upwards (bad news) periodically. If it is a revisable loan called EURIBOR 3, the rate is likely to vary once every 3 months. If it is a revisable loan called EURIBOR 12, the rate is likely to vary once every year.

The variable or revisable rate is therefore an index rate, fixed according to the value of EURIBOR. It is the benchmark monetary index in Europe, reflecting the average interest rates granted by banks. To mitigate the risk of large variability in maturities, banking institutions offer what are called capped loans. These are revisable loans, but they cannot exceed the “cap” fixed in the contract. Thus, a loan capped + 1, + 2 or + 3, cannot vary by more than 1, 2 or 3 points downwards or upwards. The advantage here is to take advantage of possible low rates, but also to avoid the early repayment indemnities of the loan, since the bank does not lose money.

When should you choose the fixed rate, when should you prefer the variable rate?

Fixed rate or variable rate, one element remains the same: the comparison. Whatever the type of loan considered, negotiate with banks the initial rate, but also the other conditions relating to the loan. When it comes to real estate credit, it is important to take into account many parameters, the rate not having to be the only element useful in the decision-making. Indeed, the application fees requested, the flexibility of the credit (possibility of taking breaks and reviewing the payments up or down), the price of the bank guarantee or that of the borrower insurance have all their place in your thinking.

Regarding the fixed rate or the variable rate, remember this:

  • Fixed rate: it is recommended when interest rates are low, below 3%, in addition it provides security and stability for individual borrowers
  • Revisable rate: the capped loan is interesting as soon as market rates are around 3%, it is preferred for professionals, who will be able to pay their loan maturities more easily even if they increase.

In 2021, there is nothing to justify that a borrower, whatever his profile, is heading towards an adjustable rate loan. Indeed, interest rates are historically low and the fixed rate should therefore be preferred for all types of credit, real estate or otherwise.