A variable rate mortgage is a mortgage with a variable interest rate, that is to say, one in which the interest rate applied to the amount owed varies according to a reference index.
Although it is not the only reference index, it is very common to use the Euribor or the Libor as the reference indices for calculating the installments of variable rate mortgages. In this case, if the Euribor rises, the interest rate of the variable mortgage will rise. On the other hand, if the Euribor falls, the interest rate on variable rate mortgages will fall.
Therefore, the main characteristic of variable rate mortgages is that in contrast to fixed rate mortgages, the interest rate will vary over time and therefore the installments that we pay each month may vary each time the mortgage is revised, which will generally be every 6 or 12 months.
In general, in the variable rate mortgages, the initial interest rate that the bank will offer us will be lower than that of a fixed mortgage requested at the same time. In addition, it is usual that they have lower commissions, both for partial amortization and total amortization.
It is logical to take out a variable rate mortgage when it is believed that the Euribor is going to fall, but it is important to be able to assume an increase in the installments, since in the event that the Euribor rises, the installments that we must pay to the bank will also rise.
The choice of a fixed or variable rate mortgage should also depend on the amortization system of the mortgage. A very widespread amortization system is the French amortization system, with this system the installments remain constant (as long as there are no revisions of the interest rate), but less and less interest is paid and more and more capital is returned. Therefore, in the initial period of the mortgage, is when more interests are paid, so it may be convenient to contract a variable interest mortgage in case we believe that, at least during the first third of our mortgage, the Euribor will remain low.
It is important if we take out a variable rate mortgage, to bear in mind that unexpected increases in the Euribor may occur and that this will increase the monthly payment that we must pay each month. In case our income is not going to increase and we are not in a position to face a higher payment than the initial one, it would be better to choose a mortgage with a fixed interest rate.