Fixed or Variable Rate Loan? Which is better?

Let’s jump into a now favorable but changing interest rate loan , and let us hope that interest rates will not rise very much, or choose a fixed interest rate that may eventually have to be repaid more than in the first case?

There are many questions you should consider when you decide to take out a loan:

  • What amount do you need?
  • How much do you have to repay?
  • The length of time you can take the repayment, and a number of factors to consider.

It also includes the option of choosing to repay a loan with fixed or variable interest . At first glance, the decision seems easy: choose what is cheaper! However, it is worth taking a second look at the question because it is more complicated.

The most striking difference is that in the case of variable interest rates, the interest rate is more favorable , while in the case of fixed interest rates it is generally higher . For example, this year, in 2018, the average interest rate on variable rate loans has been around 3 percent, while fixed interest rate loans have been around 5 percent. Depending on the amount involved, this difference may amount to hundreds of thousands (or millions) of items on repayment of the loan, so it’s worth considering!

Image result for fixed and variable rate loan

A floating rate loan is cheap but can become more expensive

But in spite of the fact that the initial lower interest rate on variable rate loans seems to be attractive, the risk is higher for those who choose it . The interest rate on such loans is based on two components:

  • one is the interest margin – this gives the bank a profit;
  • the other is the reference interest – this is what the MNB publishes .

Both may vary, but the interest rate spread is limited to a certain extent and up to five times during the interest period, while the reference interest rate that the MNB determines many times, even every 3-6 months. In the case of a rising reference interest, the interest on our loan and the repayment installments, of course, will increase, in which case we will assume this risk and only hope that we are doing well .

In Hungary, the reference interest rate has not changed much in recent years, but more and more signs indicate that it is slowly coming to an end. Analysts predict an increase in interest rates by the middle of this year despite the end of the end of 2020 by the central bank president when it might be worthwhile to think about raising the benchmark interest rate.

Fixed rate loans are more expensive, but more secure

And we also have to think about raising a fixed rate loan . In this case, we need to keep the interest rate changes and the increase in repayments less , although in many cases everything remains unchanged . The bank has the possibility to change the interest rates on fixed-rate loans to the extent calculated using the interest rate change index published on the MNB’s website, and only after the expiration of the interest period, so in this case, our installment may also rise.

There are so-called qualified home loans that have fixed interest rates until the end of the term (or interest period), these are now the most popular . At the beginning of the year, 76 percent of newly taken housing loans were already. The MNB has established a housing credit rating system operated by the National Bank of Hungary in order to enhance consumer and competition. The goal was to provide banks with lower interest and cost housing loans compared to the previous market average, with consumer-friendly service throughout the term.

So which one should be?

There may be a situation – for example, if you want to borrow a short term person , when choosing a floating rate loan . For a longer term and a larger amount, however, we can do well with fixed interest . It is only worth thinking about this because the MNB also believes that in the current interest rate environment, loans with a longer interest period or fixed-term loans are safe.