Walk continues the series of articles on “Fixed Rate or Variable Mortgage in,” let us begin by defining some terms that will be present throughout the article and that will allow a better understanding of the terms used throughout the article.
If this is the first time you consult the article, then I invite you to consult the previous article in the Fixed or Variable Rate series for a better understanding of the series structure. “Fixed or Variable Rate on Housing Credit? – Part I”
SWAP or SWAP Rate of Interest on Mortgage
The swap rate represents a benchmark in determining the fixed rate on housing credit. Basically, a swap rate or an interest rate swap always involves an exchange between two parties, one being the bank and the other being any entity. In our case, it is the private customers who pay the bank a fixed interest rate previously agreed upon and in return the bank pays a variable rate, such as Good.
Thus, the game board is launched and the gains of either party are determined by the differential between the fixed interest rate and the variable. If the variable rate rises above the fixed rate contracted the customer is incurring a gain and the bank on a loss and vice versa.
Forward Interest Rate or Interest Rate Futures
As already stated in the previous article, forward interest rates reveal market expectations about the evolution of interest rates in a future time. Thus they are an indicator of the potential evolution of the main indexes of the world economy. For our case, it is possible to verify what the market expects of Good interest rates through the Good futures contracts.
We all know Good well because it is the main index in credit in Portugal. However, here is a small presentation. Good is the average rate at which the major Eurozone banks lend money to each other. From the operations that the banks make to each other to supply deficits and surpluses, an average rate is denominated Good.
Fixed Rate or Variable Rate on Your Mortgage?
The fixed or variable rate dilemma in housing credit continues, and will continue to carry significant weight at the time of decision making. In fact, there is no guarantee that the option to take will be the most profitable, not even banks, can predict the evolution of interest rates.
The reader is probably eager to know the magic formula that will elucidate him at the time of decision making. However, such a formula does not exist, and mere statements of costs and savings, which we are accustomed to reading in the press, will not help you to make such a decision either.