All mortgages have some form of maturity, which makes it important to know how this affects the loan itself. Here we will therefore try to go through this a little closer to see the impact.
Usually, the bidding time is usually divided into two different parts and it is fixed interest rate and variable interest rate. Although the term variable interest rate is a bit misleading.
Variable interest rate
Actually, there is nothing that is a really variable interest rate, but this is an interest rate that is fixed for three months. Therefore, it is also often called the three-month rate. The implication of this is that your interest rate will only remain stationary for three months and then it will be set again. Since three months is a fairly short time on the whole, this type of interest rate is often called a variable rate a bit sloppy.
The advantage of having a mortgage with variable interest rates is that this has historically been cheaper than the different forms of fixed interest rates. The big disadvantage is that you cannot know in advance what the interest rate will be. It is quite possible that the interest rate changes quite sharply from a slightly longer perspective. Then there is nothing to say that the interest rate will go up during this period, but it may as well go down and the loan will be cheaper.
If you do not have enough good margins in your finances to cope with fluctuations in interest rates, it may be better to tie up your loan. You then know what to pay all the time and you risk no unexpected increases. It will probably be a little more expensive overall, but the risk is reduced.
However, it should be said that one should always save money in an interest buffer when the interest rate is at a low level. This money is then used when interest rates go up and the loan becomes expensive. If you make sure to save money in this way when you have the opportunity, the interest rate fluctuations should not be so dangerous and you can manage a higher interest rate when it comes. Without such savings, however, there can be problems.
Fixed interest rate
This is a second type of interest rate that you can choose when you take out a mortgage. Fixed interest rates mean that the interest rate level will not change for your loan during the time you have chosen to tie up the mortgage. The usual thing is that you can choose on a binding period between 1 – 10 years.
If one is to look at the advantages and disadvantages of fixed interest rates, it is in principle the opposite of variable interest rates. The great advantage of tying up your loan is that you know in advance exactly how much money each month has to be put aside to cover the cost of the mortgage. This is especially suitable for borrowers who do not have large margins to work with. If you have a slightly more limited budget, it is good to calculate where the limit goes for how much you can afford to pay each month and with a fixed interest rate you can get a fixed cost for your loan.
The disadvantage is that the loan will normally be more expensive overall if it is tied. While it may sound a bit illogical for a borrower with poorer finances to take out a loan that is more expensive, this need not be true at all. With a fixed interest rate you can calculate exactly what needs to be paid each month and thus you have a good track of what you can afford. This means that you can more safely buy the intended home. Because it is better to pay a little more but not risk anything unnecessarily.
When you have the same interest rate all the time, you know what your interest cost is each month. It’s nice to be able to keep track of what you have to pay each month, but fixed interest is also an assurance that the interest rate will go up and that you will receive a higher cost. If you look back at variable and fixed interest rates, you can see that it often becomes cheaper with variable interest rates, but it may still be appropriate in some situations to fix the interest rate, for example if you think the interest rate situation is really good right now but that it is on the way up in the near future.
The maturity of the loan is recorded at your expense
Something else that influences what your cost will be is how long maturity / binding time you choose. If you have to pay interest on your loan for 30 years, it will obviously be much more in interest overall compared to if you repay the entire loan in say 10 years. Thus, it is not only the interest rate that is important when choosing a lender, but also the duration of the loan.
However, the term has basically the same effect on your loan as to fix the interest rate compared to running a variable interest rate. If you choose a longer term, your loan will be more expensive overall, but the cost each month will be lower. So you who have a little less money to deal with every month can thus choose a slightly longer repayment period on your loan and thus get a lower monthly cost. However, this also means that your loan will be more expensive overall.
Divide your mortgage into both fixed and floating interest rates
A mortgage loan can easily be divided into several different parts. For example, it is quite possible to have 50% as bound and 50% as mobile. You can also divide it into several parts as if this suits you. For example, you can have half the loan with a maturity of 10 years and the rest divided into, for example, half of 3 years and the rest as variable.
The advantage of splitting the loan in this way is that you can then in some way the best of both worlds. You can get some of the security if you tie up part of your loan and at the same time enjoy a slightly lower interest rate with the floating loan. You will of course also get the disadvantages of both types, but it is less bad if it only applies to a certain part of the loan.
The reason for choosing different binding times is also basically safety. If you are not sure how the interest rate will change over the next few years, you may not dare to tie up your entire loan with a certain maturity. You can instead mix a little and spread the risks. In a way, it can be said that it is the same as buying many different shares instead of investing all the money in a single one.
One disadvantage of having your loan tied up with different maturity dates is that you do not have a really good position to negotiate your mortgage. Normally, it is the perfect situation when a bond is to be negotiated, when the maturity has expired, but it will not be exactly the same when you have different maturity. In ordinary cases, you can always threaten to simply change your bank, but if you have unlocked yourself with different binding times you are always partially fixed. Then it becomes harder to bargain well.
If you plan to settle your mortgage early, it is good to know what the difference is for a fixed and floating loan. You can easily solve the mobile in principle when you wish, at no extra cost. However, this does not apply to a tied loan. If you are going to redeem a tied loan without having to pay anything extra, you must redeem the loan when the maturity period is over. Otherwise, you will have to pay something called interest rate compensation.
This is a reimbursement that you pay to the lender to cover their costs during the remaining term. The lender has borrowed money for your loan as well and has done so with a fixed interest rate which means that they have costs for the loan after you repaid it, which is not sustainable for them.
Thus, it is not particularly economical at present to settle a mortgage with a fixed interest rate in advance if you cannot get a clearly better deal for your new mortgage. You need to make a lot of money for it to be worth the extra cost. However, when it is time to renew the loans, when the maturity period has expired, it is often a very good way to negotiate the interest rate. You have a good chance to bargain here because you actually have the opportunity to switch to another bank, something your current lender obviously doesn’t want.