If you are trying to get a home mortgage without taking any risk, then you should go for a fixed-rate mortgage, as it is widely used to finance a residential property. But, what do you have to look out for in a fixed-rate mortgage? What mistakes should be avoided and how do I get the best possible interest as a borrower? We provide answers to these and other questions.
What is a fixed-rate mortgage?
With a fixed-rate mortgage, mortgage borrowers secure the financing of their property in the short, medium, or long term. The agreed interest rate remains unchanged over the entire term. Hence the name “fixed-rate mortgage”.
Can I cancel a fixed-rate mortgage?
In principle, the mortgage cannot be canceled or repaid during the term. Exceptions are possible. In this case, however, the mortgagee has to pay a prepayment penalty to the bank. This could get expensive.
If the customer chooses a fixed-rate mortgage, the bank hedges the interest rate before paying off the mortgage. This prevents it from making a loss if interest rates rise. This protection entails costs. The bank bills the mortgage borrower if the contract is terminated prematurely.
The amount of the prepayment penalty depends, among other things, on the originally agreed interest rate, the current interest level, and the remaining term of the mortgage.
What are the terms for fixed-rate mortgages?
Anyone interested in taking out a long-term fixed-rate mortgage should think about the appropriate term. As transit times can 2 to 25 years are chosen. Many banks only offer maturities of up to 10 years for fixed-rate mortgages. Insurance companies offer significantly longer terms and often offer more attractive terms even for terms that are as long as 25 years.
Read the fine print
Individual banks formulate a right of termination for fixed-rate mortgages in their contracts. The bank can use this right of termination if, for example, the mortgage suddenly has a poorer income. Therefore, read the fine print carefully. This is because most banks require a prepayment penalty from the borrower even if the bank terminates the contract. The homeowner has to take out a new mortgage – at the current interest rates. The interest rates when the mortgage is canceled may then be significantly higher than when the mortgage is taken out. This can result in the homeowner having to accept more expensive financing than before the contract was canceled by the bank.
Include unexpected events
If the borrower dies before the mortgage expires and the property is not taken over by the heirs, the bank demands a prepayment penalty. For the bank, this is an early termination of the contract.
If you sell the property prematurely because of separation and divorce, it will also be expensive. Mortgages with terms of over 10 years should, therefore, be selected carefully. Otherwise, an early dissolution can quickly cost tens of thousands of francs.
Note interest rate developments
Everyone knows this: You buy a nice expensive jacket and a week later, it costs half as much. What works with jackets also works with mortgage interest: in the form of interest that falls sharply again immediately after the contract is signed. It is annoying. Mortgages quickly cost a few thousand francs. Those who act too spontaneously usually pay too much for home finance. A mortgage should, therefore, only be taken after careful consideration. Study the current interest rate situation. Is the interest rate trend going down or up? Is a turnaround to be expected or not due to the overall economic situation? Patience pays off. An interest rate differential of 0.1% can quickly amount to several thousand francs over the years.
Security versus flexibility
By taking out a fixed-rate mortgage, you gain security as a mortgagee. At the same time, however, you are less flexible. If interest rates fall unexpectedly, stay on your “expensive” fixed-rate mortgage. Also, the property cannot be sold during the term without incurring costs.
On the other hand, the fixed-rate mortgage gives you planning security: The costs for the property can be budgeted for the agreed term. You remain relaxed even when interest rates rise: you continue to pay the fixed interest rate.
Perform interest comparison
The offers for fixed-rate mortgages differ greatly depending on the term and bank. Short-term fixed-rate mortgages are often up to 1 percent cheaper than fixed-rate mortgages with terms of 10 years or more. The supply differences between banks for the various fixed-rate mortgages can quickly make up 1/2 percent. A mortgage comparison between several banks and insurance companies is therefore important. This is the only way to ensure that you do not pay too much for your mortgage.
You should seek the help of experts before making a final decision on what type of home mortgage you want to choose.