All mortgages have a maturity that is important to keep track of when the loan is taken. This period of commitment will have a major impact on how much the loan will cost you as a borrower.
When you talk about bond term, you usually talk about so-called fixed and floating loans. Here are the advantages and disadvantages of these we will address to hopefully help you in your decision
Variable interest rate
What you call variable interest rates is actually the so-called three-month rate. This means that the interest rate on your loan is only fixed three months at a time before it changes. As it is such a short period, it is called variable interest rate.
The advantage of this short term is that the loan is usually cheaper as the interest rate is almost always lower in this way. The disadvantage is that you do not know in advance how much you have to pay each month as interest costs change as the market changes.
Fixed interest rate
The second type of bond term you are talking about is fixed interest. This means that you decide with the bank that the interest rate for your loan should be fixed for a certain period of time. The bonding time that you can choose from is between 1 – 10 years.
The advantage of having a longer bidding time is that you always know exactly what you have to pay. This is something that can be very good if you do not have large margins in your finances. Because in the case of a floating loan, there is always a risk that interest costs will rise sharply, which will not happen if you have tied the loan.
The major disadvantage is that the interest rate will be higher normally as the bank must secure its income. They do this by adding a margin to the interest rate plus guessing what the development will look like in the interest rate market in the future.
This means that a loan that has a maturity of 1 year will probably have a lower interest rate than a loan that you have fixed for 10 years.
Something that is also important to keep in mind is there is a difference if you want to settle your mortgage early. You can always redeem a floating loan. However, a loan that has a longer maturity period is not really as advantageous to settle. This is where there is something called interest rate differential compensation.
You must pay this because the bank has already borrowed money that they lend to you during the period as a binding period at a certain cost. You then have to pay this extra cost to the bank so that they do not make any loss.