Fixed or variable rate for a mortgage: how to choose

It is one of the first questions we get at an appointment: is a fixed or a variable rate better? There is no answer that suits everyone. There is an answer that suits your budget, your loan term and how much risk you are comfortable with. Here is how to find it.

The fixed rate: a payment you know in advance

With a fixed rate, the rate does not move for the whole life of the loan. Your monthly payment stays the same from the first month to the last, whatever happens on the markets. It is the easiest formula to understand and the easiest to fit into a budget over fifteen, twenty or twenty-five years.

The flip side is that a fixed rate usually starts higher than a variable one. If rates fall later, you do not automatically benefit, unless you consider refinancing, which has a cost of its own.

The variable rate: often a lower start, some uncertainty

A variable rate, also called revisable, is set for an initial period and then reviewed at regular intervals, up or down, according to an officially published reference index. The numbers in the formula give the rhythm.

A 10-5-5-5 formula is fixed for ten years, then revised every five years. A 5-5-5-5-5 formula is fixed for five years, then revised every five years. Depending on the lender, other rhythms exist, and not every formula is offered for every project.

The shorter the initial fixed period, the sooner you are exposed to variations. The longer it is, the closer the formula comes to a fixed rate.

What the law frames

In Belgium, revisions of a variable rate are regulated. The contract sets a cap on variation, and the possible increase cannot exceed the possible decrease. That does not mean your payment will never move, but it cannot change without limit. The exact cap is written in the loan offer, and it is a point to check every time.

A useful reflex: ask what your monthly payment becomes in the worst case allowed by the contract. If that amount is more than your budget can bear, the formula is too risky for you, even if the starting point looks attractive.

A qualitative example

Imagine two households borrowing the same sum over twenty years. The first picks a fixed rate. It pays the same amount every month, a little higher at the start, and sleeps easy. The second picks a 10-5-5-5 formula with a lower starting payment. For ten years the situation is the same as with a fixed rate. After that, at each revision, the payment can go up or down, within the cap in the contract.

If rates have fallen, the second household benefits. If they have risen, it pays more, but never beyond the cap. Neither made a bad choice: they simply did not have the same room to manoeuvre. A household with stable but tight income will often value the visibility of a fixed rate. A household whose income should grow, or that plans to sell or repay early before the first revision, can look at the variable option.

Questions to ask before you sign

Look at the APR rather than the borrowing rate alone: it includes file and valuation fees and reflects the real cost of the credit. Then ask about how often revisions happen, the reference index used, the cap on variation, the monthly payment in the worst case and the conditions for early repayment. Each lender has its own rules on these points, and that is where a comparison on your specific file really pays off.

One last point: the length of the loan matters as much as the formula. Over twenty-five years, a revision has time to happen several times, whereas over ten years a variable rate with a long fixed period may never be revised at all. Also think about your life plans, such as a resale, a growing family or a career change, because they weigh on the choice as much as the difference in the rate shown at the start.

We simulate both formulas on your project, with several lenders, so that you decide knowing the facts. To start, use the simulator on our website or book an appointment at the Passage Charles Rogier in Brussels, in person or by video call.