A fixed-rate mortgage is a type of mortgage in which the same interest rate is applied during the life of the loan, with which the monthly payment to be paid will always be the same.
The bank offers the mortgage loan at a fixed interest rate, it does not depend on any reference index, so the monthly installments do not increase or decrease as a result of fluctuations in the financial markets.
Financial institutions usually offer a lower interest rate for mortgage loans when the client pays his salary, uses cards, hires some type of insurance, links a pension plan, etc. It is usual that if the client does not comply with the agreed conditions or ceases to have contracted any of the products linked to the conditions of the mortgage loan, the financial institution will not apply the discount on the interest rate in accordance with the provisions of the contract, with which in this case yes would raise the monthly fee to pay.
Before going deeper into the fixed mortgage, it is important to be clear about how mortgage loans work.
What is a mortgage?
The mortgage is a right that links the property of a good to guarantee the fulfillment of an obligation. When applying for a loan to a bank, the bank may request a mortgage. We speak then of mortgage loan, denominated colloquially like “mortgage”. The most common is to apply for a mortgage loan to finance the purchase of a house, linking as a guarantee the property itself.
The borrower (who receives the money) undertakes, by signing a contract, to return the borrowed amount plus the amount corresponding to interest, in monthly installments and for a specified period of time. In any mortgage loan there is the guarantee of the borrowers and the property guarantee, that is, if the debt payments are not paid, the credit institution can execute the home.
Types of mortgage loans
Depending on the interest rate applied to the mortgage, there are mainly three types of mortgage loans:
A fixed mortgage is the one to which the same interest rate applies throughout the life of the loan. This means that the monthly payment to be paid is always the same throughout the mortgage, even if the market interest rates go up or down.
By contrast, variable mortgages have an interest rate composed of a reference rate, which is usually the Euribor, plus a fixed spread. This means that the monthly payments to be paid rise or fall depending on how the benchmark index (Euribor) does it.
In mixed mortgages the operation of the fixed and variable mortgage is combined. The interest rate is fixed for a fixed term of the duration of the loan, while the rest of the term is variable.
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Type of interest
The interest rate that is applied to a mortgage is usually expressed with the TIN and with the APR.
TIN (Nominal Interest Rate): it is a fixed percentage that is applied to the borrowed amount and that determines the fee to be paid to the financial entity.
APR (Annual Equivalent Rate or Effective Annual Rate): interest rate that indicates the cost or effective yield of a financial product. The APR is calculated according to a standardized mathematical formula that takes into account the nominal interest rate of the operation, the frequency of payments (monthly, quarterly, etc.), bank fees and some operating expenses. The APR is used to compare mortgage offers between different banks.
Mixed mortgage features
The monthly payment to be paid is always the same, providing peace of mind and security against possible rises of the Euribor or the corresponding reference index.
The interest rate with which a fixed mortgage is offered is usually higher than that of a variable mortgage.
The maximum term to which a fixed mortgage can be contracted is usually less than the term allowed by a variable mortgage.
As the repayment term is lower, in a fixed mortgage the monthly installments are usually higher than in a variable mortgage. However, depending on the fluctuations of the Euribor, the monthly installments of a variable mortgage may end up being higher than those established for a fixed mortgage if they are compared with those established at the initial time of contracting.