Are you planning to buy a house or is your real estate loan expiring? Then a variable loan could be a sensible alternative to other forms of financing. However, this type of loan has not only advantages but also disadvantages. We explain what a variable loan is and when you can use it sensibly.
What is a variable loan?
When buying a property, most buyers choose an annuity loan with a fixed interest period to pay for it. The variable loan is essentially the same as an annuity loan, but without a fixed interest period. If you choose this real estate loan, you pay interest every month, based on the current market environment.
The variable loan is linked to the three-month Euribor. This means that the bank reviews the interest rate every three months and adjusts it. This adjustment follows the development of the Euribor. However, you receive a personal interest rate intended to cover the individual risks for the lender.
The Euribor indicates the market interest rate at which banks themselves can obtain money. It is based on an average calculation. With a variable loan, banks review the three-month average every three months. The changes are incorporated into the resulting interest rate adjustment.
What advantages does a variable loan offer?
If you decide on a variable loan, you can benefit from interesting advantages. Since you waive a fixed interest period, the bank sets the interest rate for the loan granted somewhat lower. Depending on your individual situation, you can save a few tenths of a percentage point compared with an annuity loan.
Another point is the flexibility associated with the loan. You are not tied to a term and can cancel the loan with a notice period of three months. Of course, you must then repay the remaining loan amount or take out another loan. However, you do not have to pay an early repayment penalty for ending the contract early. This would be required for an annuity loan repaid early and can be very costly.
What disadvantages does this financing have?
However, there are not only advantages. The biggest disadvantage is obvious: If the Euribor rises over a longer period, the loan interest rates rise along with it. This means that within a few months, an attractive loan can become a loan that is difficult to repay.
Due to the constantly adjusting interest rates, it is hardly possible to estimate the financial burdens for the coming years. A variable loan is therefore not suitable as a long-term form of financing. On the contrary: The lack of an interest-rate lock-in is an enormous risk, especially in times of rising interest rates. This can even result in being unable to service the loan.
Variable-interest loan – when does such a loan make sense?
The advantages are attractive. However, the disadvantages also mean that this type of loan is only suitable for bridging a gap. There are more favorable options for long-term financing. Nevertheless, this loan is frequently used when purchasing property.
There are many situations in which you want to sell one house and buy another within a very short time. For example, this may be the case when planning a move. The problem: As a rule, you first purchase the new house so that you can move in. Only afterward is your old property available for sale, and you can sell it. This means: You receive the proceeds from the sale only after purchasing the new property, and therefore too late to finance it with those proceeds.
If the amounts for the purchase and sale are of a similar size, a bridging loan with a variable interest rate may make sense. This allows you to finance the purchase of the new property. As soon as you receive the proceeds from selling your previous property, you repay the variable loan. If this results in a financing gap, you can cover the remainder with a new annuity loan. In this way, you benefit from a temporarily favorable interest rate while still taking only a very low risk due to the short period.
Similar situations include an impending inheritance or other income. Whenever you only need to bridge a short period, a variable loan may be the more favorable way to obtain financing. In the long term, however, the risks outweigh the benefits.
Alternative: cap loan
If, on the one hand, you want interest-rate security but, on the other hand, would like to remain flexible, a so-called cap loan may be an alternative for you. The banks charge an interest-rate premium for this security. However, this loan interest rate is capped at the upper end. Within a corridor defined in this way, the rate fluctuates, although still remains flexible, but does not exceed the upper limit.
With this form of construction financing or mortgage loan, you even have another advantage: as a rule, you can arrange special repayments and thus reduce your loan burden. The cap loan is therefore a good compromise between security and flexibility. This form of financing is ideal for medium-term mortgages or short-term loans when interest rate increases are foreseeable.
Conclusion: variable interest rates only for specific purposes
When buying property, the sums involved are almost always very large. A variable-rate loan is only a good choice if you use it temporarily as interim financing. For long-term property loans, the annuity loan with a fixed interest period remains the best choice. This applies particularly in times of generally rising construction interest rates.