Longer fixed rates on mortgages: what you can gain from the banks´ new battle.

With Euribor remaining in negative territory, Portuguese banks are increasingly committed to attracting mortgage customers to fixed rates rather than variable interest rates - in Portugal, the vast majority of loans are based on the six-month Euribor. Extending maximum terms—sometimes to double the time—is one of the offers that most Portuguese banks are strongly promoting as part of a new commercial war aimed at boosting the mortgage business. But are fixed rates worth it? We give you arguments to help you decide.
 
Since the beginning of 2019, three financial institutions have already moved forward with extending the maximum term for fixed rates. CGD fired the starting shot in mid-January, doubling the maximum limit from 15 to 30 years.

Novo Banco decided to follow in the footsteps of the public bank and increased the maximum maturity from 25 to 30 years, and now it was Montepio's turn to signal its entry into this “battle,” offering a 25-year term instead of the 10 years it previously had for fixed rates.

Bankinter and BPI also already have offers among the longest maturities on the market: 30 years. BCP and Santander Totta have the shortest terms, 10 and 5 years, respectively.
 

What explains this focus on fixed rates by banks?

Since July last year, Portuguese banks have been required to fully pass on negative Euribor rates to mortgage payments. This legislation, as Jornal de Negócios points out, increases incentives for institutions to continue focusing on fixed-rate solutions.

Furthermore, given the evolution of Euribor futures contracts, these indices are expected to remain negative for at least another year. Only after March 2021 is the three-month Euribor likely to turn positive.

On the other hand, and unlike variable rates, there is no legislation determining how fixed rates should be calculated, the newspaper points out, explaining that the vast majority of institutions set the rate administratively.

Only Bankinter and Santander Totta use swaps to calculate the fixed rate they offer their customers. “These characteristics make fixed-rate credit an advantageous option for banks,” he points out.
 

Fixed or variable rate?

According to Juan Villén, director of idealista/mortgages, the extension of fixed-rate terms “is good news” because they “give consumers security.” He believes that a long-term fixed rate is “highly recommended, especially for those who do not have a savings cushion and an income that allows them to absorb a possible increase in the Euribor.”

For banks, the fact that fixed rates are being used more, particularly for longer terms, is also an “interesting” situation, because it mitigates the risk of defaults that could cause Euribor rates to rise in variable rates, concludes Juan Villén.

“Long-term fixed rates are highly recommended, especially for those who do not have a savings ‘cushion’ and an income that allows them to absorb a possible increase in Euribor,” says Juan Villén, director of idealista/mortgages.

This is, in fact, one of the biggest questions for anyone who wants to buy a home and has to apply for financing from a bank. Is a variable loan or a fixed loan better?

The answer, according to idealista/creditohabitación, will depend on the conditions of the contracting party and the market situation. Since this is probably the most important contract a person can sign in their lifetime, this is a decision that must be made carefully.

Variable rate: At the beginning of 2019, the 12-month Euribor was at historic lows. However, it is expected to rise gradually until it stabilizes at positive values. The six-month Euribor, which is the most widely used in Portugal and on which variable-rate loans depend, remains in negative territory and is only expected to rise in 2020.


Fixed rate: this type of contract offers customers a degree of security, as they will always pay the same rate, from the first month to the last, allowing them to organize their finances without depending on Euribor market fluctuations.

But it's not all advantages. This product protects customers from risks, but interest rates are higher than those associated with a variable rate.

So how should we choose? The answer depends on each customer's situation. Experts insist that the most suitable loan depends on variables such as the monthly income that must be allocated to pay the installment, the term in which you want to pay off the loan, the ability to increase your income in the medium term, or the percentage of the purchase to be financed.





Source: idealistanews.