What is the steady rate? Mortgage with option and interest calculation
May 26, 2019
Do you want to know what the steady rate is after consulting various mortgage offers? We will explain what differentiates this index from the entry rate and how to deal with fixed and variable rate mortgages to choose the one that best suits your needs. To begin with, we can define the steady rate as that rate paid during the regular repayment of installments, while the entry rate is only the initial one.
Comparing the entry rate with the current one is very important to understand the convenience of the loan and the amount of payments that will have to be faced during the repayment period.
The entry rate is what is usually advertised by financing offers
To attract new customers this index can be particularly low, even limited to 1%. This is the typical case of a variable rate mortgage : this type of financing requires interest to vary depending on the fluctuations of some international rates, such as the ECB rate or the Euribor rate. The steady rate of a loan of this kind will be that actually paid, as a result of the reference index plus a spread. And this cost will most likely be higher than the initial one.
The mechanism for calculating the fixed rate loan is different
In this case, the entry rate and the steady rate coincide for the entire duration of the loan, guaranteeing the borrower a certain security (even if in this case, initial promotions could be possible with advantageous entry rates). But we must pay attention to the contractual clauses of the loan: if you choose a mortgage with option, there could be surprises for the borrower.
This form of loan provides that the interest remains unchanged for a certain period of time, for example 3 years: at that point, the borrower can choose whether to trigger the option and switch to a variable rate (perhaps because from the time of the signing of the contract market conditions have improved and rates have decreased) or remain at a fixed rate. However, the full rate will change with respect to the entry rate because the new fixed rate will be set on the basis of current market conditions and not those at the time the loan starts.
So, in a mortgage with an option, what is the rate system? This is the index used by the bank after each option, whether the customer chooses a variable rate or whether he opts for a new fixed rate.