What is a variable loan?
The variable loan is construction financing without a fixed interest rate. Mortgage rates are adjusted regularly every 3 months to reflect the current market situation. The benchmark is the so-called three-month Good Finance. That is the interest rate at which banks borrow money. It is a model that is suitable, for example, for interim financing, for example when there is a prospect of an early large sum from a property sale, inheritance or gifts.
What does the amount of the variable interest rate depend on?
Since the variable mortgage is a mortgage loan without fixed interest rates, the interest is regularly redefined. They are based on the Good Finance. The full length of this is called the “Cream Bank Offered Rate”. This is one of the reference interest rates for time deposits. The banks determine its amount. The Good Finance is the basis for numerous interest rate products. The three-month Good Finance is chosen for mortgage lending with variable interest rates. Due to this definition of the rules for adjusting interest rates, the variable loan is also called the Good Finance loan.
What are the advantages and disadvantages of the variable loan?
The biggest advantage and biggest disadvantage of this mortgage loan is the high flexibility. One advantage of this is that you can repay part or all of your loan practically at any time. With a classic annuity loan with a long-term fixed interest rate, this is not so easy, because you usually cannot get out of the mortgage contract without prepayment penalty. A disadvantage of flexibility is that you cannot plan interest payments over the long term, which can increase the monthly charge if interest rates rise.
Variable loan benefits
- High flexibility: The loan can be repaid at any time with a 3-month notice period
- Variable interest rates: If they fall, your monthly charge is also reduced
Disadvantages of the variable loan
- Interest rate fluctuations make the monthly charges unpredictable
Who is a variable loan suitable for?
With its advantages and disadvantages, the variable loan offers itself in different situations. This includes transition phases to interim financing, such as when the old apartment or house is to be sold and a large amount of money is expected from it. Or if a large sum of money is about to be paid out in the foreseeable future and you want to cover it by a loan until then. In such cases, part of the loan amount is usually financed through a classic annuity loan and the other part through a variable loan, which is then replaced by the receipt of the money.
In principle, a builder or buyer of a property should not be nervous when it comes to financing with variable interest rates. Interest rates rising by 0.2 or 0.3 percentage points in the short term should not be a problem for him.
Tip for prospective builders: You want to buy a piece of land first and don’t yet know when to start building? Then the variable loan can be a smart way. So you can finance the property in the intermediate phase. As soon as construction begins, cancel the variable loan and go into long-term financing. An alternative to this is mortgage lending with a short rate fix if you know that house construction should start in a year or two.
Is there an ideal time for variable loans?
The variable loan shows its benefits especially when a phase with high building interest comes to an end. Anyone who took out a long-term construction loan in early 2010 is probably still bound to an interest rate of over 4%. On the other hand, anyone who finances their property with variable interest since the beginning of 2010 has benefited almost continuously from falling interest rates.
In this case, a variable loan is the financing with the more favorable terms.
However, market interest rates are currently at an all-time low, so we currently advise you to secure interest rates over a long period if possible.
What are the costs of a variable loan?
The first and most important cost factor is of course an increasing interest rate. So that the risk remains limited, you can set an interest rate cap. This so-called cap loan protects you from an incalculable risk. But the agreement costs a fee.
In addition, banks typically charge a processing fee for the variable loan. This is regularly comparatively high, the rule is 1%. This means that the conditions for a variable loan are often less favorable than for a long-term one. For example, a loan of $ 200,000 usually incurs a fee of $ 2,000 – if you choose the loan for an interim financing over 1 year, it is a considerable chunk.
If your credit rating deteriorates over time, some banks also require a credit rating surcharge – this also increases the cost of credit. Finally, even with a variable interest rate, the comparison is worthwhile in order to get the most favorable conditions.
Can a variable loan be converted into a fixed rate loan?
The notice period for a variable loan is usually 3 months. Upon termination, the loan can be converted into a fixed-rate loan. This can make sense, for example, if borrowing rates should rise significantly in the foreseeable future due to a change in the monetary policy of the Cream Bank. However, the conversion costs a fee.
With a term of 10 years, around 2% of the loan amount is usual, i.e. 0.2% per year. However, since you previously paid a fee for the variable loan, you had to spend more on fees overall than the borrower who opted for a long-term loan from the start.