The fixed-rate mortgage is relevant for construction and real estate financing and a form of real estate loan. Whenever large amounts are required over a long period of time, the question arises whether the risk of interest rate fluctuations has been adequately hedged. Especially in times of low interest rates, the builders are striving for fixed interest rates.
A fixed rate mortgage that sets interest rates over ten years or more is the appropriate financing tool for security-conscious builders and property buyers. However, it should also be noted that there may be changes in interest rates that make this form of real estate financing a cost burden.
Advantages of the fixed rate mortgage
A mortgage is mainly needed when real estate projects need to be financed for a very long time. A mortgage is characterized by interest, repayments and related retention periods. The interest rate determines the amount of interest that must be paid each year. However, redemption payments are usually due on an ongoing basis, which reduce the capital contract and thus lower the interest burden.
As a rule, the lower cost burden from interest is used to raise the repayment. This ensures a quick repayment of the mortgage. The payment regulations are precisely defined during the contract period. In the case of a mortgage with a fixed interest rate, the interest burden is precisely determined for a medium to long-term period.
Disadvantages of the fixed rate mortgage
Whether a current interest rate level is high or low cannot always be estimated with sufficient accuracy. It is conceivable that despite low interest rates, interest rates will continue to fall. A fixed-rate mortgage is not adjusted downwards in terms of interest rates during the term. So you can’t benefit from the trend of falling interest rates. Even early termination of the loan agreement is not easy to implement, because in this case financers can demand high prepayment penalties. Borrowers are well positioned if they have options for special repayments.
You can take full advantage of this and negotiate new loan contracts with low interest rates for missing financing amounts. For these loan amounts, too, it must then be decided whether they will be concluded in the form of a fixed-rate mortgage.
Balance the advantages and disadvantages of the fixed-rate mortgage
If you want to take advantage of the fixed-rate mortgage but want to avoid its disadvantages, then contracts should be agreed on special repayment options. It can also be helpful to split the mortgage amount over several mortgages with different terms.
After the end of the first term, you can repay large parts of the first mortgage or take out a new mortgage with changed interest rates. The opportunities and risks of the fixed-rate mortgage are thus better balanced.