Planning security is particularly important when it comes to construction financing – after all, the loan amount is generally relatively high and the repayment takes a correspondingly long time. So why should you consider a variable loan for real estate financing? Instead of fixed interest rates that run for years or even decades, a constantly changing interest rate – top or flop in mortgage lending?
How does the variable loan work?
In principle, the interest rate is not fixed for a variable loan – as is the case, for example, with a building society loan contract over the entire term. Rather, the interest rate is adjusted every three or at the latest every six months. The Euribor money market interest rate is used – the interest rate at which the so-called panel banks (a group of many European banks) grant each other bonds in dollars. Accordingly, the key interest rate of the SaversPeak Bank should actually also be used here, since the development of the Euribor is based on the key interest rate of the SaversPeak Bank.
Variable loan benefits
The borrower has to be a bit risky, but it can be worth it: as soon as the Euribor falls, this is reflected in the loan interest, at least with a three-month or six-month delay. Incidentally, a difference of 0.1 percentage points in the effective interest rate can mean savings of several thousand dollars on a building loan – depending on the amount of the repayment. If the repayment is too low or if the compound interest effect occurs, this positive effect can quickly cancel itself out – borrowers should therefore calculate precisely in order to benefit from the advantages of the variable loan.
Another plus: the relatively high degree of flexibility. A variable loan can be terminated by the borrower, again with a three-month or six-month period, without paying an expensive prepayment penalty to the bank – after all, the variable rate cannot really be used to calculate what interest income the bank will receive from the early repayment actually escape. Another advantage: the option of finally having the variable interest rate fixed and thus creating long-term planning security. A commit of course only makes sense if the target interest rate has fallen to a low level and a further drop in interest rates is unlikely.
Disadvantages of the variable loan
A variable loan means costs and risks for the borrower: with increasing Euribor or key Savers Peak Bank interest rates, the financial burden on the borrower theoretically increases indefinitely. Theoretically, this is because an upper limit on interest rates can also be set, thus reducing the risk. This cap, also called the interest cap, automatically takes effect when the interest rate exceeds a certain level. The disadvantage: the interest on mortgage lending is then fixed at this high level for the rest of the term – if interest rates on the money market fall again, the borrower pays extra. Another minus: the interest cap is not free, but has to be paid with about 2 to 3 percent of the total loan amount.
There are also other costs for the borrower: the processing fees. At first glance, these are less than a loan with an average ten-year fixed interest period – namely 1% instead of the usual 2%. However, the decisive factor is the cost over the entire term: since variable loans are primarily used for short-term financing and the average term is one year, there is 1% processing fee per year for a variable loan and 0.2% processing fee for one Fixed-rate loan with a 10-year term.
Conclusion: Borrowers who opt for a variable loan must expect that the interest rate can increase by about 0.3 or 0.4% at every interest rate adjustment date – so there must be some financial scope to cope with the higher monthly charge to be able to wear spontaneously . It is best to only use a variable loan as a bridging option, as you can cancel it at short notice – for example, if you buy a new house and want to sell your old house. The variable loan can then be repaid with the proceeds from the sale of the old property.