Mortgage loans with a mixed rate have been growing in popularity in Portugal in recent months. In this article, we will explain what mixed rates are and why they might be attractive in the current context.
What is a mixed rate?
In Portugal, mortgage loans were traditionally contracted with either:
Variable Rate – Also known as indexed loans, these are loans whose cost fluctuates based on a reference index, in Portugal, typically the EURIBOR. The rate is set for periods of 3, 6, or 12 months, being recalculated at the end of each period to reflect changes in market conditions.
Fixed Rate – Loans with fixed rates that do not change for extended periods, in some cases, for the entire term of the loan. With these loans, the monthly payment remains the same throughout the loan’s duration, providing greater predictability for household budgets.
A mixed rate loan, as the name suggests, combines characteristics of both the variable and fixed-rate loans mentioned above. Here’s how it works:
Fixed Rate Period – For a certain part of the loan term, typically 2, 3, or 4 years, the interest rate remains unchanged.
Variable Rate Period – After the fixed-rate period, the interest rate converts to the EURIBOR plus a spread. The spread is determined at the beginning of the loan to eliminate the risk when transitioning from a fixed rate to a variable rate.
Why opt for this rate?
The mixed-rate loan has become highly sought after due to the current economic uncertainty. While it is expected that market rates will eventually decrease, the speed at which this will happen is uncertain. As a result, banks are offering loans with fixed rates for shorter periods to reduce the uncertainty for borrowers.
The main advantage of a mixed rate loan at the moment is that it essentially results in a loan with a negative spread. To make it clearer, let’s consider the following example:
- EURIBOR 12-month rate – 3.8%
- Spread – 0.80%
- Mixed rate (2 years) – 3.20%
By choosing a variable rate loan under the current market conditions, the borrower would pay an interest rate of 4.60% per year, which is the sum of the index rate plus the spread. However, some banks are currently offering a 2-year mixed rate of 3.20%. This means the spread is effectively negative by 1.40%. In this case, opting for the mixed rate for the first two years can be very benefitial.
Should you choose this rate for your mortgage loan?
The decision between a mixed rate for the short term and a variable rate is an immediate one. There should be little doubt about this choice. Of course, the EURIBOR rate could fall very quickly, making the mixed-rate option less attractive. However, it seems unlikely that the decline will be rapid within such a short time frame.
If you still have doubts, we suggest that you consult your Lead Kash advisor by filling out the form below. Ask your questions, and we promise to help.
