Although fixed mortgage interest rates are most often the focus of attention during periods of rising Euribor, when there is a risk of higher payments, there is no such threat in the current situation. However, according to Ainar Leppänen, member of the management board of SEB and head of retail banking, this option should not be completely ruled out. /nginx/o/2021/01/06/13562592t1hed40.jpg)
Mortgage. Illustrative photo Photo: Shutterstock
Although fixed mortgage interest rates are most often the focus of attention during periods of rising Euribor, when there is a risk of higher payments, there is no such threat in the current situation. However, according to Ainar Leppänen, member of the management board of SEB and head of retail banking, this option should not be completely ruled out.
Forecasts show that Euribor could fall to three percent by the end of the year and stabilise in the 2.2–2.7% range in the following years. Leppanen noted: “At the moment, a fixed-rate mortgage is more advantageous for the client than a floating-rate mortgage.”
Let's take an example: if the bank and the client agree on a risk margin of 1.59%, and the client chooses a floating rate, which on August 13 was 3.441%, then the final interest rate on the mortgage will be 5.031%. But if on the same day the client fixes the rate for five years, the total interest rate will drop to 4.07%. Even fixing for a shorter period will be more profitable than a floating rate linked to the six-month Euribor.
It is important to remember that fixed rate offers change daily, and the conditions may be different the next day. It is also worth considering that changes in Euribor will lead to adjustments to floating rate payments.
Leppanen stresses that Euribor's forecasts are only estimates, and there is no guarantee that the rate will remain the same in a few years. It depends on many factors, including the economic situation, inflation and the actions of central banks.
If rates fall sharply, a fixed rate may become less profitable than a floating rate. Making a decision based on forecasts is always associated with risk.
In addition, early repayment of the loan, changing the lock-in period or switching to a floating rate during the lock-in period may result in additional costs, such as a fee for changing the contract or compensation for the interest difference if the fixed rate is higher than the market rate.
Currently, a fixed-rate mortgage offers lower interest rates and monthly payments than a variable rate mortgage, which is especially important at the beginning when the interest portion of the payment is high. "Fixing the rate gives you the confidence that your payments will remain the same for the chosen period, which makes it easier to plan and control your expenses," Leppanen said.
The fixed rate also provides greater stability in a volatile market. At the end of the fixing period, the rate will again depend on the risk margin and the current Euribor, but the client will be able to fix the rate again under new conditions.
“Whether to fix the interest rate or not is the client’s decision and depends only on him, but every mortgage borrower should think about it and discuss it with the bank’s consultant,” Leppanen concluded.
