People who want to buy a house or apartment often take out a mortgage with a bank in order to finance their new home. There are various different types of mortgages, the most important ones being:
Before buying a house or apartment, it is advisable to thoroughly inform yourself about these different models of housing finance.
The first step is to carry out an analysis of your own financial situation. The point is to determine to what extent you are able to cope with changes to interest rates – this is the key difference between the various mortgage models. Some cost a little more, but therefore you don’t have to worry about interest rate fluctuations for a fixed period of time. Other mortgages are slightly cheaper, however this comes at the cost of increased uncertainty.
Tip: it is best to calculate your budget several times using different mortgage models – you will quickly see which mortgage best meets your needs. Your personal bank advisor will be happy to help you reach a final decision.
How does a fixed mortgage work?
This mortgage’s interest rate is fixed for a defined period. This is typically for one or two years, however it may also be possible to fix the interest rate for up to 10 years. During this period, you are locked into this particular bank and mortgage model. You will only know whether this form of home financing was worthwhile at the end of the mortgage’s term.
Advantages:
- The level of expenditure on your house or apartment is fixed and therefore predictable.
- This provides some security when budgeting.
- If interest rates rise, you remain unaffected.
Disadvantages:
- If interest rates fall, your mortgage interest rate will not change and you will therefore not benefit.
- You are committed to a particular bank and mortgage model for a fixed period.
- Cancelling a fixed mortgage often involves paying additional fees.
How does a variable mortgage work?
This mortgage has no fixed interest rate, instead it is regularly adjusted every few months. With a variable mortgage, you are also not locked in for many years.
Advantages:
- They are flexible and you can switch to another mortgage if necessary.
- You benefit if interest rates fall.
- It is possible to combine a variable-rate mortgage with a fixed-rate mortgage.
Disadvantages:
- If interest rates rise, you will have to pay more.
- The level of expenditure on your home is not fixed and is therefore unpredictable.
How does a Libor mortgage work?
Libor stands for London Interbank Offered Rate, this is the interest rate that banks charge to each other to borrow money. This rate is usually more favourable than a variable rate mortgage, but may be much more volatile.
Advantages
- You will benefit very quickly from falling interest rates.
- Thanks to its simple financial model, the interest rate is always transparent.
- You can switch to a fixed-rate mortgage quickly if needed.
Disadvantages
- The fluctuations with a Libor mortgage can be enormous, greatly increasing the interest rate in a very short time.
- If you opt for a Libor mortgage, you need to be able to cope with these fluctuations.
Many banks offer the option of guaranteeing a maximum interest rate for a Libor mortgage in exchange for a small additional charge. This is referred to as a CAP mortgage. You benefit when interest rates fall, and when they rise, an upper limit is set, enabling you to budget accordingly.
