Yle recently reported that for a hundred-thousand-euro loan, the wrong interest rate decision can cost thousands of euros. That is a significant sum. Yet, few first-time buyers stop to properly consider the choice before the bank is already offering the contract for signature. At OUN®, there are no commissions or bank sales targets, so we can say it straight: both options are justified under the right circumstances, but they suit different people for different reasons.
What are we actually talking about
In practice, a variable-rate loan means that your monthly loan installment fluctuates with market interest rates. The most common reference rate in Finland has been the 12-month Euribor. When the Euribor rises, the payment installment increases. When it falls, you get a breather.
A fixed interest rate, on the other hand, is locked in for an agreed period, typically 3, 5, or 10 years. The bank prices its own margin and the risk of forecasting into it. Therefore, a fixed rate is almost always more expensive at the starting level than a variable rate. You get predictability, but you pay for it.
When a fixed rate is justified for a first-time buyer
A fixed interest rate starts to be a sensible option when your finances cannot withstand surprises. Buying a first home often means the loan is large relative to income and buffers are thin. If the monthly installment were to rise by 200-300 euros, it could actually mean there is no money left for food. In that situation, predictability is not a luxury but a safeguard.
Fixed rates are also worth considering if you are buying a home in a situation where market rates are exceptionally low. Then, locking it in can protect against a rise. Conversely, if rates have already risen high and the market expects a decrease, locking in a fixed rate at the peak is a bad deal.
A few situations where a fixed rate should be seriously considered:
- The loan is over 85 percent of the home’s price and savings are low
- A child is expected in the family or another major change is coming in the near years
- Your income is irregular or you are an entrepreneur
- You simply don’t sleep peacefully at night when thinking about interest rate risk
When a variable rate is justified
If there is flexibility in your finances, a variable rate has historically been the more affordable choice in the long run. That is not marketing talk; it is a mathematical fact about how banks price the risk premium of a fixed rate.
A variable rate suits a first-time buyer who has a reasonable buffer, stable salary income, and some ability to tolerate fluctuations in the monthly installment. It also suits you when you plan to pay off the loan aggressively and trust that you won’t need the full loan term.
One concrete way to test your own situation: calculate how much your monthly installment would increase if the reference rate rose by 2 percentage points. If you can manage that without your budget falling apart, a variable rate is likely a sustainable solution.
Calculation example without the bank’s angle
Let’s take a simple example. A hundred-thousand-euro loan, 25-year repayment period.
If the variable reference rate is, say, 3.0% and the bank adds a margin of 0.7%, your total interest rate is 3.7%. The monthly installment is roughly about 510 euros.
If the fixed rate for the same loan is 4.5% for five years, the monthly installment is about 555 euros. The difference is about 45 euros a month, or 540 euros a year. In five years, the difference is 2,700 euros if the variable rate stays at the same level.
But if the variable rate were to rise by 2 percentage points, the situation would flip: the variable installment would be about 625 euros, which is about 70 euros a month more than the fixed rate. In five years, that makes over 4,000 euros. One way or another, we are talking about thousands of euros.
No one knows where interest rates are going. That is the honest answer.
A combination that is rarely mentioned
Some banks offer the possibility to split the loan into two parts: one with a fixed rate, the other with a variable rate. It is clunkier to manage, but it diversifies risk in a practical way. If you can’t decide, this can be a compromise, and not a bad one.
It is also worth checking if the fixed-rate agreement has redemption terms. If you want to pay off the loan early or change the interest rate, banks may charge so-called lost interest. This has gone unnoticed by many first-time buyers.
The decision is yours, not the bank’s
The bank does not make this choice for you, even if it makes recommendations. It has its own interest in selling the product that is more profitable for it at that specific moment.
The right question is not which interest rate is better in general. The right question is which one fits your situation, budget, and risk tolerance.
Thinking About Buying a First Home?
If you want someone to review your chosen property objectively without a commission motive behind it, OUN® does exactly that. Contact us before you sign anything.
OUN® reads the property documents for you and provides a plain-language analysis within 24 hours. We are 100% on your side – we don’t sell properties to anyone.
