Is a fixed or variable interest rate better when interest rates are falling?
Currently, there is a noticeable trend of falling interest rates for residential loans. When choosing between a fixed and a variable interest rate for bank loans, it is crucial to understand the differences and risks of both options.
Fixed interest rate provides stability. The borrower knows how much they will pay each month, which allows for easier budget planning. The risk is reduced, as fluctuations in interest rates do not affect monthly obligations. However, the fixed interest rate is often higher at the beginning, meaning you may pay more compared to variable interest rates, especially in the initial years of loan repayment.
Variable interest rate can adjust based on market conditions, meaning monthly payments can increase or decrease. This offers the possibility of lower initial costs, but it brings the risk of instability – during periods of rising interest rates, monthly costs can significantly increase.
Choosing between these two options depends on your risk tolerance, financial stability, and market expectations.
Currently, banks are facing relatively weak demand for loans from non-financial companies, which they are trying to compensate for by financing households or with an increased supply of consumer loans.
According to the Bank of Slovenia, recently among newly approved residential loans, loans with fixed interest rates are strongly predominant. Fixed interest rates from banks have gradually decreased since the end of last year, with some banks advertising fixed interest rates below three percent for ten-year residential loans, while EURIBOR is also quickly sliding towards the three percent mark. The six-month EURIBOR, which banks most commonly use for loans with variable interest rates, fell below the 3.1 percent mark in September, and it is expected to drop below three percent by November, continuing its downward trend next year.
Lower interest rates therefore also increase demand for residential loans.
As of September, interest rates have been reduced* at OTP (most notably for the ten-year loan, by 0.5 percentage points), Sparkasse, BKS, Unicredit, and Delavska hranilnica. Based on advertised fixed interest rates, Unicredit bank currently offers the cheapest option.
The longest term for a fixed interest rate is 180 months. The interest rate is generally dependent on the creditworthiness of the borrower. Each bank also has specific conditions regarding additional costs at the time of loan agreement, and account management fees vary, so it makes sense to check all costs when looking for the best loan options. Interest rates are almost always negotiable. However, caution is advised – a lower interest rate may be conditioned by the purchase of additional services (life insurance, investment funds, premium accounts...), which can significantly impact the total cost of the loan.
If you are facing a major life decision regarding the purchase of real estate, licensed real estate agents from BCaktiv agency will be happy to answer your questions and provide you with professional advice in your decisions.
*Source: bank websites
