The first question is to perceive the price of money through a fixed rate; the second questions is, are you able to assume a short term mortgage, such as 10, 20, 30, or 40 years, and have capacity for installment amortizations in addition to paying the monthly installment.
Interest rates are expected to rise and the big question is whether it pays to be cautious by opting for a fixed rate that is more expensive but compensates in the long run, or by opting for a variable interest rate that can be overwhelming but potencially less expensive.
Paying a variable rate vs a fixed rate mortgage has a significant cost difference. We present two examples of mortgage credit trading institutions, and these figures take into consideration the following information: age, income, and other debts (such as credit cards, life insurance, multi-risk insurance.)
1. A mortgage with a variable rate stated by Euribor* of 1.7%** (with product acquisition), and the interest rate payable will be just around 1%**, despite the fact that the Euribor* index is negative in the various maturities (3.6 and 12 months).
2. A 30-year fixed rate, on the other hand, costs nearly twice as much, or 2.9%** yearly. Certain banks also offers a hybrid system with a set five-year rate of 2.4%** (with product acquisition) and a variable rate for the remainder of the contract, which will be negotiated at the time and based on market conditions. This strategy is appealing to people who can pay off their mortgage in whole or in part during the first five years.
What are the risks?
The decision to use a fixed or variable interest rate for a mortgage that involves owning and maintaining a home is based on each person's predictions for the future of the Bank of Portugal. Between the end of this year and the start of the next, several storylines predict a trend reversal to the upside.
Martin Kasaks, a member of the European Central Bank's (ECB) Governing Council, recently stated that the ECB is not considering raising rates, but that the institution "is ready to act" if the pattern of rising European average inflation continues in the second half.
The ECB anticipates that inflation will fall below 1%** after the global supply and logistics chain problem is rectified, which will only happen once manufacturing output interruptions caused by the pandemic are resolved. The ECB has already stated that it will reduce and stop purchasing assets under “quantitative easing”, but that it will continue to purchase assets under the pre-pandemic model, which leaves everything as it is. In March and June, the ECB will issue another prediction and signal trends.
However, whether or not we know the direction of interest rates, those who take out a fixed-rate mortgage face extra risks. In fixed rate contracts, the cost of amortization and transfer between fixed rate banks is 2%** of the transferred amount, compared to 0.5%** in variable rate contracts.
Borrowers, on the other hand, should be informed of what they are signing and will be required to read the information pack carefully, as this contains all the financial facts of what they are signing, as well as the draft contract and the mutual agreement supplementing the deed. Some banks have terms in their contracts that allow them to raise the fixed interest rate, so be extra careful with this.
In the event of abnormal market situations the customer is given a deadline to resolve (finish) the contract or end up having to accept high interest repayments. For cases where the property is the main Residence, borrowers should not accept these conditions and the bank will have to take responsibility, although it is difficult for it to assume a value of 1.5%**, 2%** or 2.5%** to 30 years or 40 years.
*EURIBOR – is a rate indicator https://www.euribor-rates.eu/pt/taxas-euribor-actuais/
** Interest rates are subject to change over time, these are merely examples at the time of writing this blog.