Your neighbor refinanced his mortgage at an amazing rate of 1.49%! Meanwhile, a week ago, your advisor gave you a rate of 1.99%. Your monthly payment is $1,000 higher than a similar loan. You call your advisor in anger. His first question will probably be... 'What kind of fixed rate does your neighbor have?'
'That doesn't matter!' – 'No, it does.'
The fixed interest rate on a mortgage loan is the period of time during which the interest rate remains unchanged. After the fixed period ends, the interest rate changes according to current market values.
“Investing is like putting money in a casino…”
For every mortgage, except for FLOAT (more on that later), you agree on the terms for a predetermined 'fixed' period (1.5 or 15 years, for example). After this period expires, you renegotiate the terms of the loan and they change for the next fixed period. Many things can change after the fixation period, but the most important is the interest rate and the associated repayment.
So why is it important to deal with this? Fixation allows you to better plan your family finances, as you know exactly how high your repayment will be for a given period. For example, you can set up a savings or investment 'counterproduct' for your mortgage, which will help you better prepare for a change in interest rates. If your repayment increases for the next fixed period, you can have savings and will not be under such pressure.
A longer fixed period is very often 'redeemed' by a higher interest rate. So can it be more advantageous?
A mortgage is not a 5-year loan; most of us will be here for 20 or 30 years. So let's go back to the beginning and compare ourselves and our neighbor, for example, for the first 10 years of a $5 million mortgage, where we would fix for 10 years at 1.99%. Our neighbor would pay 1.49% for the first 3 years, 3.09% for the next 3 years, and 1.99% for the last 4 years...
In 10 years, we would pay CZK 2,214,720 in installments.
Our neighbor would pay CZK 2,264,538.
So, with simulated but realistic interest rate changes, our neighbor will end up paying CZK 49,818 more over 10 years. Doesn't that seem like a big difference? Let's take a look at the loan balance.
