Financial education

Advantages and disadvantages of the different types of mortgages

Carlos Mendiola 2023-03-08

When buying a home, the most common thing to do is to look for a financing solution that will cover the cost involved. Mortgage loans are a financial tool that allows you to buy the home you want if you do not have the capital needed to do so, in exchange for paying regular instalments and using the home as collateral to guarantee repayment of the loan.

There are two very different types of mortgages: fixed rate mortgages and variable rate mortgages. Each has its advantages and disadvantages and your choice will depend on a number of factors.

What is a fixed rate mortgage?

A fixed rate mortgage is one where the interest rate remains the same throughout the term of the loan, i.e. the cost of borrowing remains constant and will not vary as market interest rates fluctuate, meaning that you will always pay the same monthly instalment.

It is often a good financing option if you value financial stability above all.

Advantages of a fixed rate mortgage

  1. Your mortgage repayments will not change over time.
  2. You will not have to worry about changes in Euribor rates.
  3. It is easier to calculate the total cost of the loan.

Disadvantages of a fixed rate mortgage

  1. If Euribor rates fall, the actual mortgage repayments will not decrease.
  2. Interest rates on fixed mortgages tend to be slightly higher than on variable mortgages.

What is a variable rate mortgage?

A variable rate mortgage is one where the rate of interest varies according to the interbank interest rate (Euribor), which means that the monthly repayment may vary over time.

The bank’s margin or differential is then added to the Euribor rate to calculate the actual interest rate charged to the customer. For instance, our MoraBanc Super Mortgage offers a minimum rate of Euribor 12M + 0.5% (after applying all interest rate rebates). This means that the mortgage will use the benchmark rate of 12-month Euribor and add an extra 0.5%, which corresponds to the margin (differential) charged by the bank to the customer.

Typically, variable rate mortgages are subject to regular (usually annual) review periods, where the interest rate is adjusted to reflect any changes in Euribor.

Advantages of a variable rate mortgage

  1. Lower initial interest rate than on a fixed rate mortgage.
  2. Long-term savings potential if Euribor rates fall.
  3. Generally lower fees.

Disadvantages of a variable rate mortgage

  1. If Euribor rates rise, so will the monthly repayments.
  2. Uncertainty in long-term monthly repayments.
  3. Calculating the total cost of the loan is difficult.

In short, both types of mortgage loans have their advantages and disadvantages. While fixed mortgages offer a fixed and predictable monthly payment and protect you against Euribor fluctuations, variable rate mortgages offer better financing conditions but are directly affected by changes in Euribor, thus exposing you to more risk.