Are you starting a mortgage? Are you not orientated in what is meant by mortgage fixation? Let’s talk what it means and what other aspects of fixation to consider in the selection.
What is mortgage fixation?
Mortgage fixation is a period for which the interest rate will not change for you.
How does fixation work?
When negotiating a mortgage, the client chooses the length of the period for which he will be guaranteed the same amount of interest rate, thus obtaining a guarantee of the same amount of installments during this period. At the end of the “fixed” period, a new amount of repayments is agreed for the following period (however, it is also common for a one-off repayment of the loan after the fixation expires).
The most frequently offered fixation period is 1 year, 3 years, 5, 10 and 15 years (offers of different banks may be different), while most clients choose the golden middle way, ie fixation for 5-year period. Given the choice of fixation time, be aware that the shorter the time you choose, the lower the interest you expect. On the other hand, interest rates increase when banks choose a longer period, as banks are not able to estimate more precisely how the financial market will develop in the long run;
Fixation of interest is independent of later decrease or increase of interest, ie fixation is advantageous for the bank in the first case (you pay more on interest), in the second case for you (you pay less).
New from 2016
Since 2016, new contracts can be repaid early: up to 25% of the total debt can be repaid each year at no charge. The old rule, which determined the impossibility of extraordinary payments / early repayment without sanctions, ceases to exist.
How to choose the fixation length correctly?
To decide on the right fixation time, you need to evaluate several aspects of your current financial situation. Consider the following:
- If the bank cuts interest at the time of your fixation, you do not pay the same interest. From this point of view, long-term fixations can be considered disadvantageous: in the case of a drop in interest, the client still pays his fixed interest for many years.
- Keep in mind the potential transfer of the mortgage to another bank at the end of the fixation – refinancing. You can save a good package.
Often, transferring a loan to another bank is a good step towards a cheaper mortgage. This is not the case if you are not at the end of the fixation. If you decide to refinance your mortgage at the time of the fixation, it will cost you large penalties. Also consider this when considering the length of fixation.
Attention! Do not confuse fixation and interest with APR. Only the APR will tell you how much you will overpay each year and how much your mortgage will cost you.