Choosing which rate is the most advantageous, for your mortgage loan, can prove to be a real headache between security, foresight and changes in monthly payments.
We clarify for you the definitions of fixed and variable rates as well as those of semi-fixed and progressive rates.
1. Fixed rates, its real estate credit safely
The vast majority of French people borrow at a fixed rate, thus promoting security. The fixed rate mortgage can vary from 5 to 30 years. These fixed rates vary according to several criteria:
- The duration of the loan: the longer it is, the higher the rate
- Your personal contribution: it provides access to more advantageous grids, and an important contribution facilitates negotiation.
- The region
- Your profile (profession, status, income, age)
When signing your fixed rate loan, you know the amount of the monthly payments and the total cost of the loan. Fixed rate loans allow you to be very predictable on your finances and especially to compare more easily different loan offers . Indeed, with a fixed property rate, you know precisely the APR of your credit, which is not the case for variable rates.
Depending on the terms of your loan, you may be able to renegotiate your rate with your bank or redeem your credit from another bank. If you negotiate a lower rate, you can:
- Maintain an equivalent level of monthly payments and lower the term of your loan
- Lower your monthly payments by keeping the same duration
On the other hand, if real estate market rates rise, your credit rate will stay at the same level.
Finally, the early repayment of a fixed rate loan generally generates penalties and can reach up to 3% of the outstanding capital .
2. Variable or revisable rates, a bet on the evolution of the rates
Banks can offer credits whose rates vary. These variations are indexed to those of the rates at which the banks finance themselves. The loan rate is therefore periodically revised according to the evolution of an index, usually the Euribor index .
At a time T, the rates of the variable rate loans are lower than the rates of the fixed rate loans.
If you know that your income will increase, choosing a variable rate may allow you to borrow more with a lower initial rate. You can then switch to a fixed rate when your income has actually increased.
Subscribing to a variable rate loan is therefore a bet on the evolution of the price of money for banks: the starting rate is lower than that of a fixed rate loan for the same duration, but the total cost of your loan is at the mercy of economic decisions that are difficult to predict.
Two things must be kept in mind:
- It is possible to negotiate for all or part of the increase in the rate to be passed on over the duration of your credit so as not to increase the monthly payment. Of course, if the duration of your loan is already high, your room for maneuver will be reduced and your monthly payments will increase irretrievably.
- Generally, early repayment of a variable rate loan does not result in a prepayment penalty .
For variable rates, we strongly recommend to opt for capped rates : these are capped rates upward and / or downward to limit the risk of fluctuations. This course can be of two types:
- Cap exclusively on the rise and so you be protected against an interest rate too high. It is not limited to lowering and your rate may therefore become very low.
- Cap upward and downward (so-called “tunnel rate”). Adding a downside allows the bank to protect itself against a significant loss of money related to lower interest.
Banks mainly offer “capped +1” or “capped +2” rates. If, for example, you benefit from a variable rate loan with a cap of +1 to 2%, the tunnel interest rate may therefore vary between 1% and 3%.
Your monthly payments will be adapted according to the economic conjecture. The clauses of your contract may take into account the possibility of changing your floating rate into a fixed rate in the event of a rise in market rates.
Imagine a home loan of € 150,000 with a repayment term of up to 15 years. Banks will offer either a fixed rate loan or a variable rate loan.
The 2% fixed rate loan will result in monthly payments of € 965.26 for a total interest cost of € 23,747.43 .
In the table below you will find two assumptions, with a different rate variation, for a variable rate loan with a capped rate of +1.
The first hypothesis, pessimistic, is a fixed rate of 1.8% in year 1 with monthly payments of € 951, 51 and then 168 monthly payments to € 1,016.98 due to the increase in the capped rate + 1 to 2, 8% so the cost of the loan will be 3,271.02 .
3. Semi-fixed or mixed rates for short-term purchases
There are real estate loans whose rates are:
- Fixed during the first years (5 to 10 years) lower since the duration on which the rate is fixed decreases.
- Variables thereafter (capped or not).
If you want to buy a property for a short term or make a rental investment , this type of loan is interesting: you sell your property before interest becomes variable and benefit from lower rates. The starting rate is often lower than conventional fixed rates.
4. Progressive rates, when your income will increase
This type of loan is little known to French and bankers, it is a mortgage on a fixed rate basis providing for a steady increase in monthly payments each year. Your monthly payments will be lower at the beginning than at the end.
This mechanism reduces the cost of credit since you pay a little more each year. Few banks offer it.
It allows to negotiate a higher loan amount because the calculation of the cost of debt is usually done on the first monthly payment. The cost of credit is reduced with this type of loan, indeed, the increase in monthly payments makes it possible to shorten the duration of the loan and thus mechanically its cost.
There are loans specific to certain cases: housing change, rental investment for example.
Ask your banker to calculate the maximum monthly payments before accepting a capped variable rate loan offer .