Stay Away From Variable Loans
The majority of builders and buyers opt for a real estate loan with fixed interest. However, this is not the only loan option available for mortgage lending. Another variant is the variable loan, which is very widespread, especially abroad. In the meantime, there has also been an increased interest in this form of financing in Germany.
The reason for the interest is above all the low interest on loans. The interest rate is a little lower than a loan with fixed interest rates. But even an interest rate advantage of up to two tenths of a percent can lead to a large savings, taking into account the loan amount and the term. In addition, it would have been worthwhile for many borrowers to finance a variable amount in recent years. Most of them would have saved money because of the interest rate development.
Lack of calculation security for real estate loans with variable interest
Nevertheless, we generally advise against variable real estate loans. In fact, most borrowers are well advised to opt for fixed rates. The reason for this is the much higher calculation certainty. Already at contract signature is certain that the loan interest will not change for a long time. So the exact rate is always foreseeable.
This is not the case with variable real estate loans. The interest rate is variable, ie it is adjusted taking into account market developments. Depending on the bank, the adjustment takes place monthly or quarterly. This is exactly where a great risk comes with. Possibly, the contract signing loan rate is easily portable. But if market rates pick up, so does the monthly rate. It may then be tight for the borrower, or in the worst case, he may not be able to finance it.
Incidentally, this type of financing is the reason for the financial crisis in the USA. Almost all the owners had put on variable loans. As market rates picked up, the rates became more expensive. Suddenly, millions of Americans were no longer able to service their loans. The entire market burst and banks suffered billions in losses.
When the loan can be useful
However, we do not want to give the impression that real estate loans with variable interest rates are in principle a bad choice. In certain cases, it can make sense to opt for this financing option.
A very good example is the financing of building plots. Often, first of all, it is about acquiring the land. Anyone who takes out a loan with fixed interest rates easily goes into the dependency of a bank. There is usually no choice but to finance the entire construction project via the same bank. There is no longer a way to use the differences in the condition of the banks for their own benefit. A variable loan provides relief, the landowner can replace the existing financing at any time and completely refinance his entire construction project.
Likewise, variable loans are useful when a borrower wants to be wealthy and wants to stay flexible. For example, it sometimes happens that wealthy homebuyers do not spend their capital on real estate, but prefer to invest in stocks or other assets. In this way, they remain flexible and have the opportunity to convert their variable loan into fixed-rate financing or simply replace it.