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“Let’s talk about money”: fixed or variable rate borrowing?

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In the latest edition of its information series “Let’s talk about money”, the Austrian Financial Market Authority (FMA) explains the difference between fixed and variable rate borrowing. Three fictitious scenarios demonstrate how high the monthly loan repayments and the total repayment amount may be, depending on the development of interest rates for the borrower.

“We are currently experiences historically low interest rates – it is highly probable that interest rates will increase over time”, remarked the FMA’s Executive Board Members Helmut Ettl and Eduard Müller. A fixed interest rate provides borrowers with security – it is possible to secure yourself against very high risks for a relatively small amount.

In the example provided by the FMA, a loan of € 300,000 is taken out with a term of 20 years. Depending on the development of the interest rate, the monthly repayment instalment may range between €1,299 and € 2,133 in the respective cases of a favourable or unfavourable development for the borrower. The total repayment amount varies between € 336,176 and € 459,402 in these two scenarios, i.e. by more than one third of the loan amount taken out. If the borrower opts for a fixed interest rate, the repayment amount is € 347,434. In this case – compared against the scenario of an unfavourable interest rate development – the borrower is able to save € 111,968.

During the first half of 2021, approx. 90,000 private residential mortgage loans were granted. Around 40% of the volume of new lending was with variable interest rates. The average loan amount stood at € 180,000, and therefore was 15% higher than in the comparable period in the preceding year.

Further information can be found here.