Four boring (but important) explanations
1. What' s the meaning of "interests rates"? The cost of money.
"Interest rates" means the cost of the money to be borrowed. It is expressed in percentage over a period of time. E.g. if the interest rate is 6%, it means that for 100.000 euros, you'll give back to the bank 6000 euros more (within the period of time specified).
2. Fixed interest rate = Fixed instalment
If you choose a fixed interested rate mortgage, the installment (i.e. the money you have to get back to the bank) is fixed throughout the whole period of time you chose.
3. Spread: a fixed percentage for the bank
In mortgages, the word "spread" means a fixed percentage for the bank. Usually it is imposed in the composition of the installment for a adjustable rate mortgage.
4. Adjustable interest rate = Installment that VARIES following a market indicator (for instance Euribor) + Spread.
If the interest rate is adjustable, you may not know clearly how much you have to pay each month. Part of your installment is linked to an interbanking index (in Italy, the Euribor). The other part of your installment is a fixed percentage called "spread" that you owe to the bank. Supposing that the index will fall to zero, you still will have to pay the spread for your mortgage.
What the bankers won' t tell you
For many years adjustable interest mortgages were more interesting than fixed. For this reason, many small savers were convinced in investing in this product.
Fixed rates advantages
. who has a regular wage does not want any surprise: every month he wants to pay the same amount for the whole period of the mortgage
. the amortization schedules of the capital are clear and well defined in the notary's office
. during the time, the instalments of this kind of mortgage are less "heavy" on a family's accountability.
Fixed rate disadvantages:
. the initial instalments can be expensive.
Adjustable rate advantages:
. the initial instalments can be less expensive (in comparison with a fixed rates mortgage).
Adjustable rate disadvantages:
. the installment is linked to market fluctuations and, therefore, it changes every now and then (monthly or every quarter) the amount of the installment is based on a complex calculation which the bank decides. Even if you discover a mistake in this calculation, it is hardly possible that you will be able to challenge the bank. You're not guaranteed by a notary and therefore it is easier for the bank to induce you to link your mortgage with other expensive products such as assurances and financial instruments.
When it is an adjustable rate mortgage suitable for me?
An adjustable rate mortgage is interesting for a small saver when he is expecting money to arrive in the near future
That is the case of an heritage or when he is purchasing a house with the intention of reselling after a period of time. In that situation, the adjustable rate mortgage allows you to take advantage of a smaller installment without taking the risk of unfavorable increases.
In my banking experience, the most important question for all home buyers is: fixed rate mortgage or adjustable rate mortgage (Arm)? In my opinion, the answer is straightforward and simple: always fixed!