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Low mortgage rates: fixed rate or variable rate, how to choose?

Should you buy a fixed or floating rate mortgage?? To choose well, it is better to compare these two formulas.

Getting a favorable mortgage rate can become a real headache for borrowers. While the vast majority of French citizens opt for a fixed rate mortgage that focuses on security, variable rate loans also offer advantages. How to choose between fixed rate or variable rate? Explanations.

What is a fixed rate mortgage?

In real estate lending, the fixed rate is a rate that remains unchanged for the duration of the loan. Monthly payments are based on borrowed capital, loan term and credit rate. Although the fixed rate is initially defined, the maturities can be constant in which case the monthly payments remain identical from the beginning to the end, or progressive. In this second case, they will be reduced at the beginning of the loan and then increase gradually each year.

What is a variable rate mortgage?

Banks offer variable rate mortgages. This rate is revised each year according to the Astro benchmark. At the beginning of the loan, the variable rate is lower than the fixed rate but it can quickly change and impact the amount of monthly payments. If you think that your income will increase in the next few years, buying a variable rate mortgage can allow you to borrow a higher amount thanks to a more attractive starting rate.

Choose between fixed rate and variable rate

Opting for a fixed rate mortgage limits risks by avoiding rate hikes during the term of the loan. This option is preferred if you agree on a repayment term greater than 15 years. Indeed, in the short term, rate increases are not significant. On the other hand, by choosing a fixed rate, the borrower will not be able to benefit from a rate cut in the event of a fall in the Astro index. In addition, at the beginning of the loan, the fixed rate is higher than the variable rate.

The variable rate has several advantages over the fixed rate. First of all, it is more interesting at the beginning of the loan and makes it possible to benefit from possible decreases during the repayment period. But most importantly, in the event of rate hikes and if this is provided for in the contract, the borrower will be able to convert its variable rate loan into a fixed rate loan. However, choosing this formula is riskier. This is why it is not recommended in the long term. In general, the subscription of a variable rate loan is only interesting if the borrowing period is less than 7 years.

Thus, the choice between fixed rate and variable rate depends essentially on your degree of risk acceptance and duration of borrowing. The capped variable rate loan may be a good solution since it anticipates that, during the borrowing phase, the credit rate can not be higher than the variable starting rate plus the capped rate.