Housing

26 October 2021

Is it best to opt for a fixed or variable interest rate?

Taking out a mortgage to buy a house or flat? Then you can choose between a fixed or variable interest rate. What’s the best choice for you?

1. What is the difference between a fixed interest rate and a variable interest rate?

With a fixed-rate mortgage, the interest rate does not change. Whether you choose a mortgage term of 10, 20 or 30 years, or borrow a large or small amount: the loan's interest rate remains unchanged for the entire term.

With a variable-rate mortgage, however, the interest rate may well change. How often it changes depends on the choice you make. The interest rate may change at most every year, or at least every five years.

What is the difference between an interest rate and an APR?

The Annual Percentage Rate (APR) represents the total cost (including costs like handling charges) of your mortgage. The APR is expressed as an annual percentage.

Note: not all charges are included in the APR. For instance, the fee you pay the notary for the mortgage deed is not included in the APR. See this brochure for all the details.

The interest rate only relates to the interest you pay, excluding the charges.

2. What are the advantages and disadvantages of a fixed interest rate?

Advantages

  • You set the interest rate for the whole term (for example, for 5, 10, 15, 20, 25 or 30 years) of the mortgage. The general rule is: the shorter the term and the lower the amount you borrow, the lower your interest rate will be.
  • The big advantage? You will not be affected by any increases in interest rates. If the interest rate is low but is expected to rise, you will benefit from fixing your low interest rate. Note: interest rate rises or falls are unpredictable.
  • You know exactly how much you will have to repay each month.

Disadvantages

  • A fixed interest rate is generally more expensive than a variable interest rate. Opting for a fixed rate is choosing security. However, security comes at a price.
  • You will not benefit from any potential interest rate decreases.

3. In which situation is it better to choose a fixed rate?

  • When you want 100% certainty and peace of mind by setting a fixed term and a fixed repayment schedule.
  • If the interest rate is low when you take out the mortgage. Especially if you think the interest rate will rise.
  • If you want to carefully plan and budget your other expenses. For example, if you are planning a major renovation.
  • If you do not have enough financial reserves to cope with any possible interest rate rises.

4. What are the advantages and disadvantages of a variable interest rate?

Advantages

  • Variable interest rates are generally available at lower starting rates of interest than fixed interest rates.
  • If the interest rate goes down, your monthly payments go down.

Disadvantages

  • Due to the interest rate being regularly revised, you will have no certainty about how much your monthly repayments will be during the term. This could be a problem if, for example, you need to renovate and you are not sure how much your project will cost.
  • If the interest rate rises, your monthly costs will increase.

5. When is a variable interest rate an attractive option?

  • When you want the lowest interest rate possible for your mortgage. Note: this is possible only at the start of the mortgage.
  • When you want to borrow for a short(er) period. The chance of the interest increasing sharply in the short term is limited.
  • If you want more flexibility and are prepared to take the risk of a rise in interest rates.
  • If you have sufficient financial reserves to cope with any potential rise in interest rates.

A few things you need to be aware of regarding interest rates:

  • A fixed interest rate is usually more expensive than a variable one.
  • The higher the amount you borrow, the higher the interest rate will be.
  • The longer the term of your loan is, the higher the interest rate will be.
  • With variable interest rates, the more frequently the interest rate is revised, the lower the interest rate at the start.

6. How is the interest rate determined?

The interest rate you agree with the bank is largely determined by the interest rates set by the European Central Bank (ECB). The ECB has cut interest rates very sharply in recent years. A low interest rate makes it attractive for people and companies to borrow in order to, for example, invest and spend. By keeping interest rates low, the ECB is stimulating the economy. Despite interest rates having remained at historic lows for several years now, the situation is unlikely to change anytime soon. The ECB has already announced on several occasions that it intends to keep interest rates low for years to come.

Interest rates, which have an impact on mortgages, fluctuate constantly. If you choose a mortgage with a fixed interest rate, you will not be affected. A variable rate will be impacted because it tracks market fluctuations. The variable interest rate rises or falls in line with an index that follows the movements of interest rates. This index is determined by law. If the index rises or falls, the variable interest you pay on the mortgage for your house or flat will also increase or decrease.

Although there are constant, but often very minor, fluctuations in interest rates, you will not notice an immediate impact if you choose a variable-rate mortgage. This is because with a variable-rate mortgage, your interest rate is not adjusted daily. The interest rate is only adjusted to the index a maximum of once a year, and a minimum of every five years, depending on the choices you made when you agreed your mortgage.. Your monthly repayment can therefore increase or decrease.

Tip

Do you want to rebuild or renovate your home? If so, opt for a renovation mortgage to cover both the purchase and renovation of your property. A separate, renovation loan may have a higher interest rate than a mortgage. Calculate here how much you can borrow.

7. How much can a variable interest rate rise or fall?

Suppose that today your mortgage has a variable interest rate of 1%, with a revision every 5 years. What if the interest rate at the first revision has risen to 4%? Will you be stuck with the consequences? Fortunately, no!

If you opt for a variable rate, ING also sets what is known as a ‘cap’. This cap determines the maximum deviation during the lifetime of your mortgage. An example makes this clear: cap +1 means that a variable interest rate of 2.5% can increase to a maximum of 3.5% and decrease to a maximum of 1.5%. With cap +2 the upper limit is 4.5% and the lower limit 0.5%.

If you opt for a variable interest rate, the law also stipulates that the original interest rate may never rise more than it can fall. This means that the interest rate can double at most.

An example: on 1 March 2021 you opt for a variable interest rate of 1.25% for your mortgage, with a term of 15 years. Then the interest rate during those 15 years can rise to a maximum of 2.5%.

Tip

When calculating your monthly repayments, take the worst-case scenario into account. That way you will not encounter surprises if the interest rate does rise. Do you want to know how much you can borrow? Calculate your budget here.

8. Can I switch from fixed to variable interest rates later (or vice versa)?

Imagine that 10 years ago you chose a 20-year mortgage with a variable interest rate. You now have reasons to want more security, for instance because your family is growing. You can choose to review your mortgage with the bank and opt for a fixed rate (if your file is approved by the bank). If you come to an agreement, you will receive a new repayment plan with adjusted monthly repayments, or with a shorter or longer term. Note: the bank may charge you for this.

9. I took out a fixed-rate mortgage 10 years ago. Since then, the interest rate has fallen sharply. Can I also renegotiate a fixed-rate mortgage?

You can do that, too. Suppose that in 2010 you took out a mortgage credit with a term of 25 years and a fixed interest rate of 3%. You can ask your bank for a new proposal, at a more favourable rate and/or with a different term (if your file is approved by the bank). Please note: the bank may charge you for this.

10. Can I have part of my mortgage with a fixed rate and part with a variable rate?

Yes, you can. Say you want to borrow 300,000 euros. You can then, for example, choose to borrow 175,000 euros at a fixed rate and 125,000 euros at a variable rate. Moreover, you can choose a term of 10 years for one mortgage and 15 years for the other. There are also mortgages that have a fixed interest rate for the first 10 years and then adjust the rate every 5 years.

Tip

Don't just focus on the interest rate. Often the interest rate you get is linked to conditions, such as taking out fire and/or mortgage protection insurance, or the sale of your own home. So, when comparing loans, remember to keep the whole picture in view.

Do you dream of owning your own home?

Still not sure about fixed and variable rates, 15 and 20-year terms, or annual or five-yearly rate revisions etc.? We are happy to do the sums for you and to help you make your dream come true.