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 work out 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.
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.