What Are The Risks Of Financing With Variable Loans?

Occasionally, prospective real estate owners will be advised to rely on variable real estate loans for financing. Most people are initially unsure and therefore find out online, where they often read that variable loans involve certain risks. In today’s post, we want to show how the risk is actually ordered.

How a variable property loan works

First, a brief explanation of what lies behind the actual loan type: A variable loan is characterized by the fact that it is not subject to any fixed interest rate. The loan interest rate is continuously adjusted to the development of market interest rates, usually at a quarterly rate.

 

Benefits of this loan type

Benefits of this loan type

Variable loans bring two great benefits, which can be very attractive depending on the financing. First, there is the fact that, due to the lack of fixed interest, a quick exit is possible. The borrower does not bind himself long, which is useful, for example, when interim financing (eg waiting for disbursement of a legacy) is needed.

Furthermore, short maturities / fixed interest offer the advantage that they promise lower interest rates. The longer the interest rate is fixed, the higher the interest rates are under normal market conditions. Who finances variable, thus achieved an interest advantage. In addition, the borrower benefits additionally when market rates fall.

 

Risks of variable loans

The ongoing adjustment of the loan interest rate represents the actual risk. If market rates rise, financing will inevitably become more expensive. Depending on the personal income situation, this is extremely risky, because possibly the loan is a major financial burden.

 

Conclusion for our example family

Conclusion for our example family

From the point of view of our family of examples, the situation is clear, since their income is considered sound, but at the same time manageable. Precisely because the family can not make big financial leaps, the risk of financing with a variable real estate loan is far too high. While the benefits may sound appealing, the risk is overstated in the end. It is therefore better, our sample family selects a classic mortgage loan with a long interest rate.