You do not take out a home loan every month. It is an important financial decision that you think about carefully. That is certainly not simple. Certainly not because many technical terms are used. Banks, for example, hit you with ‘fixed and variable interest rates’.
But what does this mean? Which choice do you make best today? And what should you certainly pay attention to? The choice sometimes influences how much you can borrow.
Fixed interest rate
This is fairly simple: your interest rate remains the same throughout the entire term of your loan. So you know in advance how much you will pay each month.
So you do not have to be afraid that your interest rate will be increased at a certain moment, but a reduction is also not possible. A fixed interest rate mainly gives you certainty.
Variable interest rate
In this case, the interest rate of your loan may change at certain times. Credit formulas with a variable interest rate often seem cheaper than those with a fixed interest rate. But of course you have to take into account the fact that the interest rate can be raised in the future …
Many different mortgage credit formulas with variable interest rates are possible. Consider, for example, an annually revisable interest rate, a five-year review, a ten-year review … Sometimes you get those crazy situations where a bank uses a variable interest rate for a bridging loan, but the duration of the bridging loan does not exceed the variability. The variable interest rate actually becomes a fixed interest rate for your bridging loan.
What do the numbers mean?
A credit formula with variable interest rates is usually expressed in figures: 5/5/5, 10/5/5, 1/1/1 … But what exactly does this mean?
- 5/5/5 : this means that your interest rate will be reviewed for the first time after five years (the first digit). A second and third revision will follow after another 5 years (the second and third digit).
- 1/1/1 : Hereby your interest rate is reviewed every year.
- 10/5/5 : the first interest rate revision is provided after ten years, then every five years thereafter.
What should you pay attention to with a variable interest rate?
The fact that your interest rate is revised can have both a positive and a negative effect. If your interest rate increases, your loan suddenly becomes more expensive and you will have to pay a higher monthly payment.
If the interest rate goes down in the event of a revision, your monthly burden will also decrease and your loan will become cheaper. Can your lender raise or lower your interest rate without restriction? No, the legislator provides for a number of protection measures.