Fixed rate home loans are becoming increasingly popular. Because paying off your installments for years may seem more secure, but interest is higher than fixed pay, so you’ll have to pay back much more (even millions) for security.
Although more expensive is a fixed rate loan, many people prefer it, as the repayment installment thus provides the same amount each month, which is more transparent and provides security for borrowers, but this is why we have to pay more interest for calm than for variable rate loans.
Which Interest Period is Winning?
According to experts, the interest rate on fixed-rate mortgages is currently higher at 5.5% compared to floating interest rates. less, 3.5%.
Everyone is probably wondering what the difference between the two types of interest will be during the loan period and when it expires, is this question not that simple, so we calculated a 3-month BUBOR for the Budapest Good Finance Offered Rate of a 3-month floating rate loan and a 5-year fixed rate loan.
What does interest rate change depend on?
Depending on the type of loan interest.
1. In the case of variable interest rates:
- if the rate of the BUBOR changes, the interest on the loan will also follow this on the date of the interest period
- The other reason for the variable interest rate is the function of the interest margin, which is a change in the interest rate premium that is fixed in the contract. Fixed to the end of the term, or change every 3,4,5 years.
2. The fixed interest rate may change only according to the interest rate change indicator specified in the contract. (3,4,5,10, 20 years or fixed maturity.
The duration of a current home loan is decades, and the average duration of a home loan is 15 years, so we are counting on it, considering the loan amount of HUF 10 million.
Long-term interest rates change several times over the term. We have had several options to determine how variable interest rates affect our repayment schedule.
- BUBOR will increase by 2 percentage points in 2 years.
- BUBOR will increase by 4 percentage points in 8 years
- BUBOR will grow by nearly 6 percentage points in 12 years
- BUBOR increases by 2 to 2% with a gradual rise of 2.8.12 years after admission.
- The last option in the calculation is to have nearly the same repayment at maturity of the two loans.
Then which is better?
According to our calculations, we have to pay more in the third year, from HUF 71,000 to HUF 83,000, the repayment is expected to reach HUF 14.5 million. In the case of a fixed one, our monthly installment will increase to HUF 82,000 at the beginning, and then to HUF 93,000 after 5 years. At the end of this term, there will be a final repayment of $ 16 million that we had to pay. We can see that the floating interest rate has been won because the interest rate on the fixed rate loan increases every 5 years.
According to our 2nd calculation, after 8 years, our repayment will increase from HUF 71,000 to HUF 93,000, a 4% increase in BUBOR. The fixed loan will increase from HUF 82,000 to HUF 104,000 by the end of the 10th year. here is higher by 23%, which is a difference of HUF 1.4 million.
In our 3rd calculation, if BUBOR rises by 6% after 12 years, we will pay a similar repayment over the term of the fixed loan. For the floating rate loan, our installment in the last 3 years is HUF 104,000. However, the total repayment is more favorable than the variable loan. We pay $ 654,000 less in this case, which is 14% lower than a fixed loan.
In our 4th calculation, the difference could be larger than that of a stepwise BUBOR, as interest rate increases in the middle of the term are mitigated by fixation. However, the interest rate difference here is 14%. We pay most interest on this variation on both options, so this is the most expensive option for borrowers.
In Example 4, the BUBOR changes even after 1 year, rising to the current interest rate before the period end of the fixed loan. In this case, we would need a 7% increase in interest rates to make our repayment repayments nearly the same. This can only happen in a special case. Even in the 2008 crisis, we saw only a one-off interest rate increase of 3%. This is only 5.5% higher than previous increases.
For those who would not change their installment for 5 years, they are warmly offered a 5 year fixed rate loan. The same can be true for 10, 15 year term loans. The interest on these loans is higher and their installments may also increase after the 1st period.
The final repayment of a fixed loan is almost 100% higher than a floating interest rate. Based on the examples above, this can be stated.
What if we fixed it all the way?
Today, many banks can apply for fixed-term loans, so you need to compare the fixed-interest loan products over the entire term, as in the examples above. If the loan has a fixed interest rate for the entire period, it has an interest rate close to 1 percentage point higher than the options fixed for 5 years, so we could expect an interest rate of 6.5%.
In this case, the repayer will pay HUF 87,000 per month until the end of the repayment, the interest paid will be HUF 5.7 million.
A fixed rate loan has less interest paid in case of the 3 rd calculation (6% increase in case of 12 years), or in case of a periodically increased interest rate loan. Non-fixed loans are less, in only 1 case, with periodically increasing interest rates higher than fixed-term loans for the entire loan period.