Mortgages in 2023: fixed or variable rate?
Are you wondering whether a fixed rate mortgage or a variable rate mortgage would be more convenient? Let's see the advantages and disadvantages of both options in light of the current macroeconomic context.
In 2023, the mortgage market appears to be complex, with increasingly high costs due to the impact of monetary policy interventions by the European Central Bank, which is gradually raising interest rates to tackle inflation.
In the current economic context, those who already have a mortgage in progress are exploring the possibility of renegotiating the terms of their financing to secure more favorable conditions. At the same time, those looking to purchase a home with a mortgage are faced with the age-old dilemma: should they opt for a fixed or variable rate?
Fixed rate: security and stability
A fixed rate mortgage is a type of loan in which the interest rate remains the same throughout the entire loan term, providing borrowers with a predictable and consistent monthly payment. This allows you to know the total cost of the mortgage from the start, making it easier to plan your long-term budget with greater certainty.
However, while a fixed rate mortgage provides stability in the face of market uncertainties, it may come at a higher cost than a variable rate mortgage when markets are stable.
Variable rate: flexibility and potential savings
A variable rate mortgage is a type of loan where the interest rate applied to the borrowed capital fluctuates over time. The rate is typically linked to the performance of a reference index that is updated periodically, such as every 3 or 6 months.
If the index decreases, the monthly payment also decreases, which can make this type of mortgage more advantageous compared to a fixed rate mortgage. However, it's important to keep in mind that a variable rate mortgage carries a higher level of uncertainty and risk. This means that you need to be prepared to adapt to the fluctuations in your monthly payments.
Capped variable rate to limit uncertainty
There is an intermediate solution between the flexibility of a variable rate mortgage and the stability of a fixed rate mortgage: the capped variable rate. In this case, the interest rate fluctuates according to market conditions, but it's limited by a predetermined maximum threshold or "cap". This way, the borrower is protected from potential excessive interest rate increases while enjoying some stability in monthly payments.
It's important to note that in addition to the maximum limit, there might also be a minimum threshold (the "floor") below which the interest rate cannot drop, even if the market goes down. Therefore, it is crucial to conduct a thorough evaluation of the related expenses and any constraints before considering this alternative.
Fixed or variable rate: which mortgage to choose in 2023?
The European Central Bank (ECB) has been raising interest rates, leading to a substantial increase in variable rate mortgage payments, with some seeing an increase of up to 30%-40%. Since predictions suggest that inflation will remain above the 2% threshold deemed acceptable by the ECB for some time, it is likely that the Bank will continue to raise interest rates in the coming months, with further negative effects on mortgage rates.
Interestingly, if you're applying for a new mortgage today, opting for the variable interest rate may be a more advantageous option in the long run. This is due to the fact that interest rates are expected to reach their highest point this year, and then will gradually start to decrease, leading to favorable variations in your monthly payments.
If you opt for a fixed interest rate, your payments will be calculated based on the IRS index, which has increased significantly compared to 2022. The FABI (Federal Association of Building Societies and Private Home Loan Banks) recently estimated that the average interest rate for new fixed rate mortgages has exceeded 4%. So, while the benefit of a fixed rate mortgage is that your payments remain constant throughout the loan's duration, it is clear that this advantage will diminish as the curve begins to invert.
How to switch from a variable rate to a fixed rate?
If you initially chose a variable rate but now wish to switch to a fixed rate to safeguard against future increases, you essentially have two options: subrogation and renegotiation.
The subrogation allows you to transfer your mortgage to another bank at no extra costs, renegotiating the terms of your financing to take advantage of more favorable conditions.
Alternatively, you can renegotiate the mortgage directly with your current bank to switch from a variable to a fixed interest rate. However, it's important to note that this is dependent on the bank's approval, and there is no guarantee that they will agree to your request.
Italy’s 2023 Budget Law has established the requirement for banks to accept requests for mortgage renegotiations until the end of the year. However, certain limitations apply: the mortgage amount must not exceed 200,000 euros, and the applicant's ISEE (Equivalent Economic Situation Indicator) must not exceed 35,000 euros. Additionally, the applicant must be up to date with their mortgage payments.
Mortgages and real estate market
The real estate market is undoubtedly influenced by the increase in mortgage costs, as confirmed by the First Report on the Real Estate Market 2023 by Nomisma, which predicts a decrease in real estate transactions by 14.6%. This is certainly a significant figure, but one that brings the market back to more sustainable levels after the post-pandemic boom.
It should also be remembered that real estate continues to represent a good investment against inflation. And while the stricter lending requirements are making it challenging for prospective buyers to obtain credit, demand remains positive, especially in big cities.