French Mortgage Variable Rate vs Fixed Rate
The choice between variable rate vs fixed rate mortgages is an important choice. Following the financial meltdown, the ECB lending rate remains very low and is unlikely to rise before 2017. For the latest information go to the ECB Website.
Money market rates have also moved down rapidly as credit has become less restrictive.
Variable Rate
The initial rates on variable rate mortgages are currently at record lows, though they will probably start to edge upwards. For current rates go to French Mortgage Rates
However, when interest rates rise, variable rate mortgage rates will follow. With rates eventually set to rise you may be unsure whether to choose a variable or a fixed rate product.
Over the long-term, variable rate mortgages are likely to cost less than fixed rate mortgages. This is because the borrower, not the bank has to carry the interest rate risk.
Fixed Rate
Historically fixed rate mortgages are cheap and for this reason, there is an attraction to taking a fixed rate mortgage and setting the mortgage rate for the life of the loan.
Over the long-term, fixed rate mortgages are more expensive over the life of the loan but do provide peace of mind if you are worried that the repayments on your mortgage may rise.
Capped Rate
In the current market, Capped rate products combine the best of both variable rate and fixed rate mortgages that can cost less than a fully fixed rate but nonetheless give good protection against rising interest rates.
The Bottom Line
Essentially the choice between a variable or a fixed rate mortgage is a gamble. With a variable rate the borrower takes the gamble and with a fixed rate the bank takes the gamble.
The bank will always charge more for a fixed rate mortgage than you might calculate because it must build in a margin of error and a risk premium.
So, unless you are confident that you can outguess the bank and believe that the bank has mispriced the risk the variable rate mortgage should always be cheaper in the long run, ceteris paribus as the economists say (all things being equal).
