When you take out a mortgage loan, you can choose between two different credit options: a fixed or a variable interest rate. Which interest rate is the most attractive for your situation? A brief word of explanation is perhaps called for.
Borrowing at a fixed rate of interest
What does a fixed interest rate involve?
A fixed interest rate means that the interest rate is fixed at the start of your mortgage loan. It is important to note that this percentage will not change again, regardless of developments in interest rates.
When should you choose a fixed interest rate?
A fixed interest rate can be advantageous if interest rates are low at the time you take out your loan – especially if you think that rates are set to rise. In that case, you'll continue to benefit from the low interest rate despite the increase in rates.
The benefits of a fixed interest rate
Your interest rate remains the same every month until the end of your loan. You are shielded from any unpleasant surprises regardless of whether your loan has a term of 15, 20 or 25 years. The fixed rate makes it easier for you to plan your other expenditure and means you can play things safe.
The disadvantages of a fixed interest rate
You'll be unable to profit from any interest rate falls.
Variable interest rate
What does a variable interest rate involve?
If you opt for a variable interest rate, your interest rate will be adjusted after a certain period of time. This can work in your favour if the interest rate falls, or to your disadvantage if it rises. The exact timing of the interest-rate reviews is set out in the loan product description. The review takes place at most annually, and at least every five years.
When should you choose a variable interest rate?
Variable options are chosen more often when market interest rates are high. Customers hope that the interest rate will fall during the term of the loan.
The benefits of a variable interest rate
A variable interest rate can rise or fall within a certain band
It is a great comfort to know that the rate of interest can only go up to a certain level. Therefore if interest rates go up unexpectedly, the rate increase is limited to a pre-set level. A fall in interest rates is similarly limited. The margin within which the rate can rise or fall is called the fluctuation band.
The law provides that interest rates are adjusted using the periodic (monthly) interest rates. The fluctuation bands are calculated periodically, too. Because there is no linear correlation between the monthly interest rate and the real annual interest rate, the new annual rate will be higher than the sum of the initial annual interest rate and the annual fluctuation band.
Suppose you opt for a loan with an interest rate reviewable every five years, starting with a 3.5% interest rate. The fluctuation bands are -2% and +2%. Expressed periodically, this is an initial interest rate of 0.2871% per month and a fluctuation band of -0.1652% and +0.1652%. After five years, on the rate review date, the maximum your rate can rise is to 0.2871% + 0.1652% = 0.4523%. This is equivalent to an annual rate of 5.56%.
The variable options that KBC offers and the relative fluctuation bands can be seen in our schedule of charges.
Reducing or extending the term
If you opt for a variable interest rate instead of a fixed one, KBC provides you with additional flexibility. On the review date, you can shorten or extend the remaining credit term (or time to maturity). Just look in KBC Touch at what an extension or reduction in your term means to the amount of your monthly repayments. You can register your choice with just a couple of taps in KBC Touch.
This lets you perfectly match how long your home loan runs for to the situation of your particular household. For instance, when your kids go to uni, you'll have extra expenses to deal with. So, when your review date comes round, you could extend your time to maturity so that your monthly repayments fall.
The disadvantages of a variable interest rate
If market interest rates rise, your monthly repayment will increase after the interest-rate review.
How to decide which option is the best for you?
If you go for a variable option, you should always take account of the future interest charges if the interest rate rises. Are you prepared for paying these higher interest charges and is that financially feasible? Or would you prefer to have absolute certainty? If so, you'd maybe be better going for a fixed-rate option. It's also possible to combine the fixed and variable-rate options.
Talk about what you envisage for your home to one of our YourHome Experts any time that suits you.