Mortgage loans: fixed or variable interest rate?

Raymundo Larraín Nesbitt, March, 11. 2022

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By Raymundo Larraín Nesbitt
Lawyer - abogado
11^th of March 2022

In a context of high inflation (Spain has hit 7.4%, the highest in 33 years) protecting your family’s savings becomes a top priority.

Financial advisers normally recommend two options to protect yourself against rising inflation:

The first one is to buy gold (which is rallying)
The second is to buy real estate (which is also rallying)

As a result of buyers and savvy investors buying into the real estate market - to hedge themselves against the pernicious effects of rising inflation - property prices in Spain have increased by an average of 8% p.a. (by two digits in coastal areas, such as Malaga).

Moreover, 2021 was the best year in property sales since 2007. We need to go back in time 14 years, to the heyday of Spain’s property boom, to see such great sales numbers (565,523 properties sold).

As a result of this buying frenzy, a frequent question we get asked is: Should a borrower choose a fixed or variable interest rate in their mortgage loan?

The short answer is that in today’s high inflationary context, we strongly advise a borrower chooses a fixed interest rate.

The reason being is because although Financial Authorities the world over are bending over backwards not to increase interest rates (to protect and secure the fledgling post-pandemic economic recovery), arguing that this inflation is only temporary, the fact is that given recent geopolitical events (read war) inflation is not only here to stay but will significantly increase over the course of the next years.

This translates into an interest rate hike, whether they want it or not, in the near future.

If you have your mortgage loan referred to a variable interest rate, and Monetary Authorities keep raising the interest every quarter over and over again (as it is highly foreseeable) your monthly repayments are going to increase dramatically to the point you may no longer have the financial ability to service them. Which strongly implies borrowers may default in view of rising interest rates.

For this reason, at LNA, we recommend our clients to take on mortgage loans with a fixed interest, so no matter what unfolds in the near future (more volcanoes, more pandemics, more financial crisis, more wars, etc) you know exactly how much you need to repay your lender every month. Because peace of mind is priceless.

That said, you should be aware that some enterprising lenders, in view of a foreseeable hike in interest rates, have amended their loan conditions on fixed rate loans, slightly increasing them.

Bottom line, if you still want to grab yourself a (very) competitive mortgage loan with (an ultra-low) fixed interest, you should act quickly and get a move on.

At LNA we can assist you buying, selling or renting out your property in Spain. We have 19 years’ experience in conveyance & tax. We are also specialized in Immigration & Residency permits.

Larraín Nesbitt Abogados, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in taxation, inheritance, conveyancing, residency, and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88, or by completing our contact form to book an appointment.

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