What is a fixed mortgage?

In-depth analysis of fixed-rate mortgages: Everything you need to know

A fixed-rate mortgage loan is a type of mortgage in which the same interest rate is applied for the life of the loan, so the monthly payment is always the same. The bank offers the mortgage loan with a fixed interest rate. It does not depend on any reference rate, so the monthly repayments neither increase nor decrease as a result of fluctuations in financial markets.

Financial institutions usually offer a lower interest rate for mortgage loans when the customer has direct-deposit, pays with cards, purchases some type of insurance, has a pension plan, etc. Usually, if a customer does not comply with the agreed terms and conditions or cancels any of the products linked to the terms and conditions of the mortgage loan, the financial institution will not apply the discount to the interest rate as established in the contract, and, in this case, the monthly repayment would increase.

Before learning more about the fixed-rate mortgage, it is important to understand how mortgages work.

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What is a mortgage?

A mortgage is a right that links the ownership of an asset in order to guarantee the fulfillment of an obligation. When applying for a loan at a bank, the bank may require the setting up of a mortgage. This, then, is a mortgage loan, usually referred to as a “mortgage”. The aim of a mortgage is usually to finance the purchase of a house, and the property becomes the guarantee of the loan.

The borrower (who receives the money) commits, when signing the contract, to returning the amount lent plus the amount corresponding to interest, in monthly repayments and over a specific period of time. In all mortgage loans there is the personal guarantee of the borrowers and the guarantee of the property. This means that if the borrower does not keep up to date with the repayment of the debt, the credit institution may repossess the home.

Types of mortgage loans

There are three main types of mortgage loans based on the interest rate applied:

- Fixed-rate mortgage.

- Variable-rate mortgage.

- Mixed mortgage.

A fixed-rate mortgage is one in which the same interest rate is applied for the life of the loan. The mortgage repayment will be the same amount every month, regardless of whether the market interest rates rise or fall.

Variable-rate mortgages, on the other hand, have interest rates composed of a reference rate, which is usually the Euribor, plus a fixed differential. This causes the amount of the monthly repayment to increase or decrease depending on the reference rate (Euribor).

Mixed mortgages combine the features of fixed-rate and variable-rate mortgages. The interest rate is fixed during a part of the loan term and variable during the rest.

Interest rate

The interest rate applied to a mortgage is usually expressed with the NIR and the APR.

NIR (Nominal Interest Rate): it is a fixed percentage that is applied to the amount lent and that determines the amount of the installments to be paid to the financial institution.

APR (Annual Percentage Rate): interest rate that indicates the actual cost or yield of a financial product. The APR is calculated based on a standardized mathematical formula that takes into consideration the nominal interest rate of the operation, the frequency of payments (monthly, quarterly, etc.), the bank fees and some operation expenses. The APR serves to compare different mortgage offers among different banks.

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Mixed mortgage characteristics

The monthly payment is always the same, providing peace of mind in light of possible increases in the Euribor or the associated reference rate.

Fixed-rate mortgages typically have a higher interest rate than variable-rate mortgages.

The maximum term possible for a fixed-rate mortgage is usually less than that allowed for a variable-rate mortgage.

As the amortization term is shorter, monthly repayments are usually higher in a fixed-rate mortgage than in a variable-rate mortgage. However, depending on fluctuations of the Euribor, the monthly repayments of a variable-rate mortgage may end up being higher than those established for a fixed-rate mortgage if compared with those established at the start of the contract.

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