Depending on the interest rate that is applied to the mortgage, three main types of mortgage can be distinguished:
- Variable-rate mortgage.
- Fixed-rate mortgage.
- Mixed mortgage.
A mixed mortgage combines a fixed mortgage and a variable mortgage (although in reality it is basically variable). During the first years of the term of the loan, the interest rate based on the operation of the fixed mortgage is applied, and during the remaining term the interest rate is applied according to the operation of a variable mortgage. In order to fully understand the operation of a mixed mortgage, it is necessary to know the details of these other two types of mortgages.
A fixed-rate mortgage is a type of mortgage loan in which the same interest rate is applied for the life of the loan. The interest rate is not subject to any reference rate (Euribor). Therefore, the interest rate does not vary and the monthly payment is always the same throughout the life of the mortgage, even if market interest rates go up or down.
A variable-rate mortgage is a mortgage loan in which monthly payments increase or decrease according to the reference rate (which typically is the Euribor). The interest rate applied to the mortgage consists of the Euribor rate plus a fixed differential. This means that when the Euribor goes up, the monthly payment increases, and whenever it goes down, the amount of the monthly payment will also do so. The update of the amount of the monthly installments is usually agreed every six months using the latest value of the Euribor. This way, the same installment amount is paid for six months until it is revised.