How Interest Rates Affect Mortgage Loans

What Are Mortgage Interest Rates?

Interest rates are the percentage that banks or financial institutions charge clients for the money borrowed. This percentage is applied to the remaining loan balance—essentially, it’s the cost of the service.

Why Do Interest Rates Rise and Fall? Factors That Influence Interest Rates

These percentages are not always constant. In fact, several factors influence them. The most significant are political and economic factors, which are closely connected. Understanding these elements is key to anticipating how they might affect mortgage loans.

Monetary Policy of the Central Bank

Central banks, such as the European Central Bank (ECB), are responsible for regulating the money supply and maintaining economic stability. One of their main tools is adjusting interest rates. In other words, decisions made by the ECB directly affect mortgage interest rates.

What Does Inflation Have to Do with Home Financing?

Inflation measures the overall increase in prices in an economy. When inflation is high, central banks typically raise interest rates to slow down the market and reduce spending. These fluctuations either stimulate or curb economic activity, impacting the demand for loans.

General Economic Conditions That Affect Mortgages

Additionally, geopolitical tensions can influence interest rates. For instance, decisions made by the U.S. Federal Reserve can affect European rates, impacting mortgage financing. For this reason, if you’re considering applying for a mortgage, you’ll need to monitor market movements, as they can significantly impact your loan payments and the total cost of financing. 

Working with a reliable real estate agency, such as Engel & Völkers, is crucial for making informed decisions regarding market conditions and the economy. Our real estate agents are qualified to advise and guide you through these factors.

What Types of Interest Rates Exist, and How Do They Impact Monthly Mortgage Payments?

Now that you understand why interest rates rise and fall, it’s also important to know the types of interest rates available. Each type impacts financing differently, affecting monthly payments and the total loan cost.

Fixed-Rate Mortgage

As the name suggests, fixed interest rates remain unchanged throughout the loan term. This means you will always pay the same amount in your monthly mortgage payment. It is ideal for those seeking payment stability.

Variable-Rate Mortgage

In this case, interest rates can fluctuate based on benchmark indexes such as the Euribor or IRPH (Mortgage Loan Reference Index). This means your payments may increase or decrease over time. This type of loan comes with uncertainty, as there will be periods when monthly payments are lower and others when they become more expensive.

Mixed-Rate Mortgage

There is also a third type of mortgage loan that combines the two previous options: the mixed-rate mortgage. With this type, borrowers benefit from a fixed interest rate during the initial period, followed by a variable rate afterward. These timeframes must be clearly specified in the contract.

What Happens if Interest Rates Rise or Fall? How Do They Affect the Real Estate Market?

As we’ve explained, the evolution of interest rates directly impacts mortgages, but it also affects the real estate sector. In fact, it is one of the industries most sensitive to these changes:

• When interest rates fall: The demand for housing increases as more people can afford to buy. However, this demand may also drive up property prices.

• When interest rates rise: Mortgages become more expensive, and the market slows down. Property prices may decrease as a result, since there are fewer buyers. This, in turn, leads to higher demand for rentals.

Engel & Völkers publishes an annual report that helps you evaluate the market situation and understand how interest rate fluctuations, or indexes like the Euribor, impact the sector.

So, Which Mortgage Should I Choose?

It’s normal to have doubts about which financing option is best and how interest rates affect them.

If you’re looking for financial stability, the best option is a fixed-rate mortgage, although this means you may pay more when indexes influence the market. However, you’ll have the certainty of being able to meet your payments, no matter what happens in the economy.

On the other hand, a variable-rate mortgage gives you the opportunity to take advantage of market changes. However, if your budget is tight, this may not be the best choice.

In reality, there is no financing option better than another, as it depends on each individual’s situation.

Tips for Choosing Your Mortgage Financing: What Should You Consider?

Once you’ve chosen the property you want to buy and completed some formalities, like signing the deposit agreement, it’s time to apply for financing. To minimize risks, we recommend following these guidelines:

Assess Your Personal Situation

You’ll need to make monthly payments until the loan is repaid, so it’s crucial to evaluate your long-term financial situation. Make sure that monthly installments don’t exceed 30% of household income. In addition, banks typically finance only 80% of the property’s value. Therefore, it’s advisable to have 20% of the total amount saved, along with an extra 10% to 15% to cover expenses.

Compare Different Mortgages

Each bank offers different features and conditions. Analyze which options are most suitable for the long term. For instance, home insurance is often required—evaluate which policy provides the best coverage.

Make Sure You Understand All Terms

Mortgage financing involves many conditions that must be met. It’s important to be fully informed about them before signing the contract. Here are some key terms to keep in mind:

• Amortization Period: Refers to the time frame in which you must repay the loan in full.

• Associated Costs and Fees: Your loan includes additional charges, such as opening fees, cancellation fees, and early repayment penalties.

• TIN (Nominal Interest Rate): The percentage the bank charges on the loan amount. This rate reflects only the interest cost and does not include other associated expenses.

• TAE (Annual Percentage Rate): A more comprehensive evaluation that includes not only the interest rate (TIN) but also related expenses, such as commissions or mandatory insurance. This detail is essential to understand how much you’ll ultimately pay for your mortgage loan.

As you can see, interest rates impact mortgages in various ways. Choosing the best financing option is an important decision that requires careful consideration.

Do You Need Help with the Process? At Engel & Völkers, we have qualified real estate agents ready to advise you on the purchase or sale of your home. Simply contact us, and we’ll be delighted to assist you.