With the meeting on 6 June, the European Central Bank (ECB) has decided to reduce the interest rates by 25 basis points. This is the first cut from 2019 and interrupts the series of consecutive increases expected to try to stem the phenomenon ofinflation. The turning point is concrete and immediate, with interest rates at decline that let borrowers breathe, even if not by much.
Net of the current result, with the prospect of new rate cuts, what type of installment is best choose between fixed rate and variable rate? The numbers may not be enough to justify a choice, there are in fact pros and cons for both types. First let’s take a step back, especially for future borrowers who are approaching the mortgage application for the first time.
What is fixed rate: advantages and disadvantages of unchanged interest
Let’s start from the basics to understand where the biggest savings lie. A fixed rate mortgage it is a payment path with the interest rate remaining unchanged for the entire duration of the loan. This is a choice that aims for certainty on monthly payments, in fact the installments they do not undergo changes, regardless of market rate fluctuations. This is the ideal choice for those looking stabilitybut above all he wants avoid the risk of future increases in interest rates as has happened in recent times.
THE advantages main features of the fixed rate include:
- Predictabilitythat is, knowing exactly how much you will pay each month;
- Protection against inflation: with mortgage payments remaining unchanged even if market rates increase.
However, there are also some disadvantages. Stability is paid for, literally, with a higher initial cost compared to mortgages with variable rates and the impossibility of benefiting from reductions if they occur, just like the recent rate cut by the ECB.
An example (data not updated):
To finance buying a house of the value of 200,000 euros with a sum of 100,000 euros for a duration of 20 yearschoosing a fixed rate involves a monthly installment of 541 euros. The installment amount will not change for the entire duration of the mortgage.
What is a variable rate: pros and cons of risk
A variable rate mortgageas the name suggests, predicts that the interest rate can to vary over time based on a reference index such as Euribor. In practice it means that the Monthly installments may increase or decrease depending on market conditions.
THE advantages of the variable rate are certainly:
- Lower initial rates compared to fixed rates;
- Potential savings if market rates drop (like now), monthly payments also decrease.
There is no shortage of disadvantages, which are related to the very uncertainty of market rates, because if they rise making payment planning difficult. Finally the risk financial, because in periods of sharp increase in rates, installments can become unsustainable.
Financing example (data not updated):
With a amount of 100,000 euros it’s a duration of 20 years, at present the installment is 623 euros.
Which interest rate is most convenient after the ECB cut?
The recent rate cut by the ECB has brought interest back into the discussion possibility of choice. According to estimates, the 25 basis point reduction could result in a savings of around 15-18 euros per month for every 100,000 euros of variable rate debt, provided that the reduction is fully implemented by Euribor. This savingshowever small (up to 216 euros saved per year) represents a psychological signal for borrowers and the real estate market.
At the moment, the majority of new mortgage originations continue to prefer the fixed rate, which is more convenient than the variable rate. For example, for a 30-year mortgage of 140,000 euros, a fixed rate installment is around 648 euros per month, while for a variable one it reaches around 730 euros.
Future prospects indicate that mortgage rates may continue to decline, providing additional benefits for those looking to purchase a home or refinance their mortgage (or make other installment purchases). There choice between fixed and variable rate It largely depends on your personal needs and risk appetite. In a context of falling rates, the variable rate might seem attractive, but the security offered by the fixed rate continues to be a prudent choice for many (+17% since the beginning of the year).
Alternative green: what are green home mortgages
A growing segment in the mortgage market is that of green mortgagesintended for the purchase, construction or renovation of ecological houses. These mortgages are designed to encourage the adoption of sustainable building practices and improve the energy efficiency of properties.
Green mortgages offer several advantages:
- Concessionary interest ratesbecause banks offer more favorable contractual conditions to promote investments in ecological construction;
- Savings on billsbecause with more efficient homes there are lower heating and air conditioning costs;
- Real estate valuebecause homes with high energy performance tend to maintain or increase their value over time, making them a safe investment.
There are three main categories of green mortgages:
- Buying an eco-friendly house with mortgages intended for the purchase of properties already compliant with green building regulations;
- Construction of an eco house for financing aimed at the construction of new buildings with high energy efficiency standards;
- Renovation for energy efficiencyi.e. loans for renovation interventions aimed at improving the energy efficiency of existing buildings.
To obtain a green mortgage it is necessary to present a project that demonstrates compliance with current regulations regarding energy efficiency, including the installation of solar panels, adequate thermal insulation and efficient systems.
To draw a conclusion, the decision between fixed and variable rate mortgages it is not simple and must be carefully considered, especially taking into account the recent changes to rates by the ECB (and future ones) and one’s financial capabilities. At the same time, the option of green mortgages represents an interesting opportunity for those who wish to invest in a sustainable future, while enjoying significant economic advantages.
