Fixed or variable mortgage: how to compare risk and conditions

What you should really compare between a fixed and a variable mortgage

Choosing between a fixed or variable mortgage should not come down to looking at the first month’s payment. The useful comparison is another one: what part of the cost you know from the outset, what part may change over time, and what additional obligations they require before granting you the loan.

Law 5/2019 requires pre-contractual information to make it possible to understand the economic and legal burden of the loan. The FEIN must state whether the rate is fixed or variable, the APR, the payment frequency and number of payments, the amount of each instalment, any possible costs and early repayment. The FEIN itself states that, if the loan is at a variable rate, the effective APR could differ from the stated APR if the rate changes, and that the instalment may also increase or decrease. That idea is key to assessing the product’s real risk. BOE, Law 5/2019, Annex I FEIN

If you compare two offers, do not look only at the nominal rate. Also compare:

1. The stability of the instalment.

2. Sensitivity to future rate changes in a variable mortgage.

3. The APR, because it incorporates the total cost of the loan on an annual basis.

4. Any additional fees and linked services that affect the mortgage arrangement.

5. Early repayment conditions.

Risk: how to understand it in a fixed and in a variable mortgage

The main risk of a fixed mortgage is its lower price flexibility in the face of market movements, but in return you know the logic of your instalment from the start and can plan better in the long term. The main risk of a variable mortgage is different: the instalment may change if the reference rate or the mechanism provided for in the contract changes.

The FEIN requires an express explanation of the formula used to revise the variable borrowing rate, its components and the frequency of reviews. It also requires prominent warnings about the effect that such variation may have on the APR and on the instalments. This means that, when comparing, you should ask not only “what rate are they offering me?”, but “how is it reviewed, how often and with what limits?”.

Practical steps to assess the risk:

1. Always ask for the FEIN for each offer and read it in full.

2. Find where it states whether the rate is fixed or variable.

3. For a variable mortgage, identify the index or reference used and the margin.

4. Check whether there are any caps or floors.

5. Compare instalment scenarios, not just the initial instalment.

6. If you plan to repay early, check the compensation or fee for early repayment.

Common mistake: comparing two mortgages only by the first monthly instalment. That comparison can be misleading because in a variable mortgage the instalment may change, and in a fixed mortgage the cost is structured differently. Another common mistake is ignoring the APR and focusing only on the interest rate. The APR is precisely there to compare offers more comprehensively.

Contractual conditions that should weigh in your decision

The comparison between fixed and variable also depends on the attached conditions. Law 5/2019 allows the FEIN to include obligations such as insuring the property, taking out a life insurance policy, setting up salary payment by direct debit or taking on other linked services, and requires these obligations to be described clearly, stating who they are owed to, for how long and what cost they have if it is not included in the APR. BOE, Law 5/2019, Annex I FEIN

In addition, Article 14 requires, with a minimum of ten calendar days before signing, the delivery of the FEIN, the FiAE, a copy of the draft contract and, if it is a variable-rate loan, a separate document with special reference to periodic instalments under different interest-rate scenarios. It also sets out a distribution of costs in mortgage lending that is worth keeping in mind when comparing offers. BOE, Law 5/2019, Article 14

In practice, this helps you distinguish a seemingly “cheap” offer from one that is genuinely more convenient. For example, a fixed mortgage may seem simpler, but if it includes more tied products or ancillary costs, it is worth calculating the total impact. And a variable mortgage may have a lower initial instalment, but require you to take on more future uncertainty.

How to compare two offers without losing sight of your budget

If you are buying a home and need to structure the decision, it is advisable to work with a realistic budget rather than a mere intuition about the interest rate.

Follow these steps:

1. Gather in writing the two FEINs you are comparing.

2. Make a list of mandatory costs and optional costs.

3. Separate what falls within the APR from what is not included because it is unknown or does not correspond to that calculation.

4. Ask about the frequency of review if the loan is variable.

5. Assess how much room your finances have to cope with a higher instalment.

6. If you prefer stability, give more weight to payment predictability.

7. If you prioritise flexibility, scrutinise the early repayment conditions.

Useful advice: do not make the decision based only on what you can afford today. Consider whether you would still be able to pay if your personal situation changes or if the instalment increases. The FEIN itself reminds you that your income may vary and that you should think about whether you will be able to meet the repayment of the instalments throughout the life of the loan.

What you can ask for before signing

Before committing, you may ask for clarification on any point in the FEIN, the draft contract or the FiAE. If one of the offers is variable, ask them to explain with examples how the instalment would move under different scenarios. If one is fixed, confirm whether early repayment is possible and at what cost.

It is also worth checking the overall situation of the purchase and of the property you are financing. If you are still in the search phase, you can request an initial indication of the property value through online home valuation in Madrid, bearing in mind that this estimate is only indicative and does not replace an official valuation. If you prefer to review your specific case with more personalised advice, you can use contact.

Remember that general information does not replace an individual assessment of the loan, your ability to pay or the specific conditions of the offer. The correct comparison between a fixed and a variable mortgage is the one that allows you to understand the risk, the total cost and the associated obligations before signing, not the one that merely promises a seemingly more attractive instalment.

If you wish to review a specific transaction, you can also visit the UBICASA office at Calle Montesa 29, Madrid, Monday to Friday from 10:00 to 15:00 and from 16:00 to 19:00.