When it comes to mortgages, you often talk about two different types of interest rates and that is variable interest and fixed interest rates. Which one of these will, for example, affect how much your loan costs.
Fixed interest rate and fixed interest rate
These are two different terms for exactly the same thing that both often show up. However, it is nothing strange here but these two words are different terms on the same. It’s just that some people like to call it fixed interest rates and others prefer fixed interest rates.
If you obtain a mortgage, you can choose between a variable interest rate and a fixed interest rate. The variable interest rate is also called a 3-month interest rate, which means that it changes every three months and then follows the market level.
What is the fixed interest rate?
What differentiates fixed interest from variable interest is that it is fixed for a considerably longer period. You can choose to fix interest for 1 – 10 years. During this time, the interest rate you pay on your loan will not change, but you will always pay the same interest rate. This regardless of whether the market interest rate has gone up or down. If you had instead had a variable interest rate, your interest rate would have changed over time, but now you have exactly the same throughout the binding period.
Since your mortgage is probably considerably longer than you will have in the term of the loan, the loan is negotiated when the term of the interest rate is over. You can then choose freely if you want to tie it up again or you think variable interest rates would fit better.
Advantages and disadvantages of fixed interest rates
That the interest rate will always be the same may count as a big advantage. This means that you can plan the economy much better, since you actually know what you will have to pay each month. With variable interest rates you do not know this. So you have the advantage of knowing for sure what your monthly cost is and you can plan the economy around this.
Another benefit is security. You know that you do not run the risk of an interest shock where the interest rate rushes off considerably. You don’t have to worry about this happening and it can be safe and nice. For this extra security, you have to pay a slightly higher cost compared to variable interest rates.
Unfortunately, there are some drawbacks with fixed interest rates too, and the biggest of these is that it is usually more expensive. If you look at a variable and historically fixed interest rate, you see that the variable has almost always been the cheapest in the long run. The mortgage institutions simply charge a higher interest rate if you want to bind the loan. This is what they do to secure their income and they set the fixed interest rate according to how it is believed that interest rates will develop in the future.