Variable interest rates and mortgages: 4 frequently asked questions
Are you about to purchase a home? Or would you like to switch your mortgage? Then you also need to consider your desired interest rate and fixed interest rate term. You have probably heard the term ‘variable interest rate’. What exactly does that mean? And when is it advisable to opt for it? We answer four frequently asked questions about variable interest rates.
1. What is a variable interest rate?
When you take out a mortgage, you can choose from different fixed interest rate terms. Those terms usually vary from 5 to 30 years. This actually means you are getting security for that number of years: your interest rate will not change during that period, so you know exactly what your monthly costs will be.
However, you can also opt for a mortgage with a variable interest rate (although this is not possible with all lenders). At present (November 2018), a variable interest rate is cheaper than the interest payable on fixed interest rate mortgage terms of 10 to 30 years (and with some lenders, even cheaper than a fixed interest rate term of 5 years). That seems favourable at first glance, but can change in an instant! As it happens, variable interest rates respond to market developments immediately. This means your interest rate can increase too and your monthly costs will then also rise.
2. When should you opt for a variable interest rate?
Most of our clients opt for a fixed interest rate term of 10 years. For many Dutch buyers, security appears to be more important than the option of benefiting from an even lower interest rate. However, it can be more advantageous to choose a variable interest rate mortgage in some situations.
Briefly, these are the considerations when choosing between a variable or fixed interest rate:
Variable interest rate:
- Do you expect the interest rate on your mortgage to fall? Then you are better off going for a variable interest rate rather than a fixed interest rate. Your interest rate will then fall too.
- Do you expect to be able to pay off part of your mortgage quickly, e.g. by means of a gift or release of equity on your old property? In that case it can be advisable to opt for a variable interest rate as well, because you can pay off your loan without a penalty.
Fixed interest rate:
- Do you expect the interest rate on your mortgage to rise? Then benefit from current low interest rates and opt for a mortgage with a fixed rate term. This means you will not be affected by potential increases in future.
- Is the desired value of your mortgage close to the maximum mortgage sum? In that case it is also better to go for a longer fixed interest rate term. For fixed rate terms from 10 years, the maximum you can borrow is determined by the actual interest rate as a reference rate. For shorter terms, or a variable interest rate, a reference rate of 5% applies. The maximum you can borrow is thus considerably lower.
Average mortgage interest rates have continued to fall in recent years. People who opted for a fixed interest rate term have therefore been unable to benefit from this.
However, we cannot assume that interest rates will keep falling. Now that the economy is picking up again, interest rates will probably increase. But this remains a gamble and not a certainty, even for seasoned economists! Mortgage advisors will therefore often advise you not to go for a variable interest rate, but to opt for a specific fixed interest rate term instead.
3. What is the current (variable) interest rate?
Viisi offers a handy summary of current mortgage interest rates. You can find the current interest rates for each lender and for each fixed rate term. As you can see, not all lenders offer the option of a variable interest rate.
4. What is best in my situation?
Which fixed interest rate term is best for you depends on a number of questions. This article therefore contains four questions you can ask yourself to make a good decision.
Would you prefer to discuss your options with a professional? Then call one of our mortgage advisors with no obligation. We would be delighted to offer input and check whether a variable rate would be beneficial and advisable for you.