Our clients often ask which interest period is best for them when taking out a mortgage.
Because there are many interest rates to choose from today, it does not matter how you make your decision, because making an unreasonable decision can put a lot of costs and risk on your neck.
Consider, for example, three different loan designs of the same maturity (here 15 years). Three different interest rates, three different interest periods.
If the interest rate can be changed annually, it will be 3.68%, if the interest rate can be changed every three years, it will be 4.87%, and if the interest rate can be changed every five years, the initial interest rate is 5.37%.
Which of the above loan interest rates do we prefer?
In order to better understand the behavior of interest rates, it is important to know that, as required by the Good Finance Act , interest rates consist of two parts. There is a portion of the base rate or the base rate that is usually linked to the 3 month GFIC, but may be different. The interest rate monitored by the ABC is a guideline here. In addition, there is an interest margin component of mortgage interest rates, which is determined relatively freely by the bank, where the adjustment point is an indicator of the interest rate margin also supervised by the ABC.
So the only good answer is that this question should always be examined by a specialist who can advise anyone in the given life situation.
Method of determining a mortgage loan interest rate
If we understand the method of determining a mortgage loan interest rate, then we have to deal with another factor of uncertainty, which is that banks use a different rate from the aforementioned base rate. Therefore, being a normal earthly mortal in this jungle is almost an impossible mission.
Take the example of a home loan at the beginning of this article. Here we examined three different interest rates associated with three different interest periods. These were relative to a base rate, that is, we could only choose between different loan products of a given bank.
Therefore, when making an informed decision, it is important to consider whether it is advisable to exclude yourself from the offers of other banks, if both the base rate and the interest rate premium may vary from bank to bank.
Interest rate roller coaster
In any case, the longer we fix the interest rate on a real estate loan, the longer we can know the extent of our repayment installment. So, if we tie our credit to a longer-term base rate and a fixed interest rate premium, we will not have to experience a potential “interest rate roller coaster” in the future, as has been the case for the past 10 years.
Here’s the graph. It is extremely instructive and well illustrates the “interest roller coaster” that if you were in the growing phase you would have been in severe forints as the mortgage repayment installment would have followed the change.
The graph above illustrates the need to think seriously about variable vs. long term home loan products . the use of a fixed interest period even if the interest rate on the loan is linked to a base rate.
What is worth examining is that if we do not fix the mortgage interest rate, its 1% increase will result in an increase in the monthly mortgage repayment installment. In addition, the average interest rate over the entire term is projected to be below or above the fixed interest rate.
It is best to consider interest rate fixation as a risk insurance that protects the loan repayment details from escaping into the sky.
Fixed-rate home loan
It is worth looking into the issue of mortgage fixation from another perspective. Fixed interest rates of 5-10-15 years increase the amount of monthly installments. The debt brake regulation introduced at the beginning of 2015 tightens the payload, meaning that the financier must check that the mortgage repayment installments do not exceed a certain percentage of the household’s pay. Thus, with a fixed-rate home loan, a lower-paid family may be able to access millions of dollars less.
Get the help and assistance of our independent credit broker to get the information you need to make the decision and make the right calculations. Expert our colleague is happy to call you if you enter your details using the form below.