Uncategorized

Fixed or floating interest rates – How it works

A mortgage loan can have either a fixed or a variable interest rate. It is up to you to decide what you think is best for yourself. Here we will explain a little quickly and easily what this means with the different interest rates.

Fixed interest rate

A fixed interest rate means that your interest rate is fixed for a fixed period. This means that the interest rate will not change during this time, but will remain at the same level throughout the bond period.

So if you have chosen a fixed interest rate and it is at 3% and you have chosen to fix it for 3 years then it does not matter if the floating interest rate goes up to 6% during that time because you still have 3%.

The most common fixing times for fixed interest rates are 1, 2, 3, 4, 5 and 10 years and you can choose which one you want from them. Then when the maturity period is over, you get to renegotiate the loan and then you can choose to either re-bind it or change it to variable interest rates.

 

Variable interest rate

money loan

A variable interest rate is an interest rate that constantly adapts to the market. This means that one month you may have 3% for the next one with 4% in interest. However, it should be said that a variable interest rate is usually fixed at 3 months. Then, the interest rate does not normally change so quickly, but there are only small changes from month to month. It is going to something big in the world to create really fast interest rate changes.

If expectations are that interest rates will fall in the near future, the variable interest rate will initially be higher than the fixed rate. If, instead, you expect the interest rate to go up, the variable interest rate will be cheaper from the beginning than the fixed rate.

What to choose

It is difficult to say as the economic situation is constantly changing. Sometimes it is better with fixed interest rates and sometimes better with variable interest rates. What you can say as an advantage for fixed interest rates is that you always know how much you will be paid each month. The big advantage of variable interest rates is that it often becomes cheaper. It has been shown, if you look at it purely historically, that it is usually cheapest with a variable interest rate. But at the same time it may be that interest rates go up and then it becomes more expensive. It is not possible to say what is best, but it is a decision that each individual borrower must make according to the conditions on the market at the moment.

A good basic rule to have is that if you have a good economy that can handle interest rate changes of a few percent then it can be smart to choose large part of the loan as variable.

A good basic rule to have is that if you have a good economy that can handle interest rate changes of a few percent then it can be smart to choose large part of the loan as variable.

If you live instead with smaller margins, it may be best to hedge and choose fixed interest rates as the main part.

Then it is also possible to divide the loan into different parts where one part has a fixed interest rate and another part has a variable interest rate. These don’t have to be the same size but if you want 70% as a part there is no problem. It is also possible to divide the loan into more than two parts. Maybe 25% of the loan as flexible, 25% tied for three years and the remaining 50% tied for 10 years. What you feel is best is the right alternative.

Back To Top