What is the difference between a fixed-rate mortgage and a variable-rate mortgage?

The difference between a fixed and a variable-rate mortgage is essentially a choice between a mortgage loan where you will always pay the same amount (although the interest rate may initially be higher) or one that varies according to the index to which it is linked (usually the one-year Euribor).

When choosing between a fixed or variable-rate mortgage loan, three factors should be taken into account: 

  1. The term of the loan.
  2. Your income expectations.
  3. Your ability to cope with a rapid rise in interest rates.

Fixed or variable-rate mortgage? Understand the characteristics of each of them

The fixed interest mortgage is distinguished by a fixed regular payment amount, but it involves repaying capital at a slower pace and it is possible that, initially, a higher interest rate will be paid than for the variable-rate mortgage. The stability of the monthly payments and complete certainty regarding what will be paid throughout the entire duration of the loan is the foundation of this type of agreement which is not subject to market fluctuations.

The fixed-rate mortgage is especially suitable for shorter periods, not exceeding 20 years, although it is possible to find fixed-rate mortgages with a longer repayment period, up to 30 years. The fixed-rate mortgage offers the advantage of avoiding the risk of an increase in interest rates, thereby ensuring the same monthly payment throughout the life of the loan.

The variable-rate mortgage is determined according to a standard index (the most common being the Euribor, although in Spain the IRPH is also used), plus a fixed amount charged by the bank. In the market as a whole, variable-rate mortgages are still the most common type.

The variable interest mortgage is typified by its low fees (unlike a fixed mortgage, it has no charge for interest risk) and a longer repayment period (it is usual for this type of product to offer a maximum period of 30 years, although it can be up to 35 and even 40 years). The annual or six-monthly review, depending on the terms of the mortgage loan, will involve variations in the monthly payments in response to fluctuations in the Euribor or the index to which it is linked. The monthly payment will fall if the Euribor goes down.

If you are looking for the option that best suits your needs, read more about Banco Santander's fixed and variable-rate mortgages.

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