Fixed or variable mortgage: how to decide without being caught out by the Euribor

Choosing between a fixed and variable mortgage is one of the most important financial decisions most people make. Not because it is technically complicated, but because the consequences extend over decades and the interest rate environment changes constantly throughout that time.

The good news is that there is no universally correct answer. There is, however, a way of thinking through the decision that lets anyone make it with confidence, without needing to be an economist.

How each type of mortgage works

A fixed-rate mortgage always charges you the same interest rate for the entire life of the loan. Regardless of what happens in the financial markets, your payment today is the same as the one you will make in fifteen years.

A variable-rate mortgage charges you an interest rate that is reviewed periodically (usually every twelve or six months) based on a reference index. In Spain, that index is almost always the twelve-month Euribor.

The structure of a variable mortgage is simple: Euribor + spread. If the Euribor is at 2% and the bank offers you a spread of 0.7%, your applied rate that year is 2.7%. When the Euribor rises, your payment rises. When it falls, your payment falls.

There is also the mixed mortgage, which combines both: an initial fixed-rate period (usually five to fifteen years) and the remainder at a variable rate. For many people it is a reasonable middle ground, although it adds complexity to the analysis.

What the Euribor is and why it matters so much

The Euribor (Euro Interbank Offered Rate) is the rate at which European banks lend money to one another. It is published daily by the European Money Markets Institute and acts as a thermometer of financial conditions in the eurozone.

For variable-rate mortgage holders, the relevant figure is the twelve-month Euribor, which is the most common reference index in Spain. It is reviewed officially once a year (or every six months, depending on what your contract says) and changes the payment you make from that revision onwards.

The key thing to understand about the Euribor is that no single entity controls it: it responds to the European Central Bank’s monetary policy decisions, inflation expectations and the overall health of the European economy. It can rise sharply in high-inflation environments and fall just as quickly when the economy cools. Its recent history includes years in negative territory and years at highs that many mortgage holders had never seen before.

The real impact on your payment: a numerical example

To make this concrete, imagine a mortgage of 200,000 euros over 25 years.

With a fixed-rate mortgage at 3%, the monthly payment is approximately 948 euros throughout all 25 years. You can plan your entire life knowing exactly what you pay.

With a variable-rate mortgage at Euribor + 0.7%, the payment depends on the Euribor level at each revision:

The difference between one scenario and another can exceed 450 euros per month. Over twenty-five years, that amounts to tens of thousands of euros in one direction or the other.

The two key questions for making the decision

Once you understand the mechanism, the decision comes down to two very concrete questions:

How much uncertainty can you tolerate in your monthly budget?

If you need to know exactly what you will pay each month for your finances to work, the fixed rate gives you that certainty. If you have enough financial headroom to absorb payment increases without your life changing much, the variable rate offers the possibility of paying less when rates are low.

It is not just about how much money you have: it is about whether the uncertainty keeps you up at night. There are people with comfortable incomes who prefer to pay more for the fixed rate purely so they do not have to think about it. That is a completely rational choice.

What is your time horizon?

Variable-rate mortgages tend to be cheaper during low-rate periods, but that advantage can disappear if rates rise for a significant part of the term. The longer your horizon, the greater the probability that the Euribor will go through both upward and downward cycles, and the harder it is to predict which option will come out better.

Over shorter horizons (ten or fifteen years), the variable rate can offer a greater expected advantage if the spread is sufficiently competitive. Over twenty or twenty-five years, the certainty of the fixed rate has additional value that is not always well reflected in the initial comparison.

The peace of mind of a fixed rate when inflation takes off

There is one scenario where the fixed-rate mortgage really shines: periods of high inflation. And it is worth understanding why, because that is exactly when everyone gets most nervous.

When inflation gets out of control, the European Central Bank raises interest rates to cool the economy. And when rates rise, the Euribor rises. Anyone with a variable mortgage sees their payment grow review after review, sometimes in jumps of several hundred euros a month, at precisely the moment when everything else (groceries, electricity, fuel) is also more expensive. It is the worst possible time for your mortgage to go up.

With a fixed mortgage, that scenario simply doesn’t touch you: your payment is the same as on day one, whatever happens to rates. That certainty is worth far more than it seems when the rest of your budget is being squeezed from every direction.

And there is a second, quieter but very real effect: inflation erodes the value of your debt. Your payment is a fixed amount in euros, but those euros are worth a little less each year. If your income keeps pace with rising prices (even with a lag), the payment weighs less and less within your budget over time. Put another way: you repay a fixed amount with money that is worth a little less every year.

This does not make the fixed rate the winning option every time. If you lock in a high fixed rate when rates are already high, you may end up paying more than someone who chose variable and later benefited from a fall. The key is to see it as insurance against the inflationary scenario: you pay a little more on average in exchange for sleeping soundly precisely when the variable would be at its most expensive.

What the bank’s advertising does not tell you

When banks compare their products, they tend to show you the most favourable scenario for each. Variable mortgages appear in brochures with the Euribor at a given moment (which may be historically low) and the spread they offer. That initial comparison can make you believe the variable is systematically cheaper, without showing you the adverse scenarios.

There is a simple exercise worth doing before signing: calculate what you would pay if the Euribor rose to historically high levels, and ask yourself whether your finances could manage without major difficulty for one or two years at that payment level.

If the answer is that it would be very tight, that is an argument in favour of the fixed rate, regardless of what the most likely scenario is.

The costs of each option: not just the monthly payment

The interest rate is the most visible element, but it is not the only relevant one:

Fixed-rate mortgages often carry higher early repayment fees. If at some point you want to pay off part of the capital early (for example, if you inherit money or receive a bonus), the bank may charge you a fee on the amount repaid. Check the contract before signing.

Variable-rate mortgages may include a floor clause. Although these have been heavily restricted for years, make sure the contract does not set a minimum rate below which the fall in the Euribor does not apply.

Tied products. Both fixed and variable mortgages often come with better conditions if you take out other products (insurance, payroll account, investment funds). Analyse whether those tied products make sense in their own right or are only there to compensate for the margin the bank loses on the mortgage.

When a mixed mortgage makes sense

A mixed mortgage can be a good option if you have clarity about your situation during the initial period. If, for example, you expect your savings capacity to increase significantly over the next ten years (because the children finish school, or because you foresee professional growth) the mixed mortgage lets you protect yourself during the tighter years and then take on the risk of the variable rate when you have more headroom.

It can also be interesting if the fixed rate for the initial period is low enough that the cost during those first years is clearly lower than a purely fixed mortgage.

How to monitor things once you have the mortgage

Many people sign their mortgage and do not think about the Euribor again until the bank sends them the rate revision notice. The problem with that approach is that it does not allow you to react in time.

If you have a variable mortgage, it is worth reviewing the Euribor level periodically to get a sense of what the next revision might bring. There is no need to obsess over it, but having an up-to-date reading every few months lets you adjust your budget in advance.

And above all, it is worth having your monthly budget show exactly how much you are paying on the mortgage at any given moment, including any tied insurance and additional costs. The true total cost of your mortgage is not just the payment; it is the payment plus everything the bank requires you to have in place to keep the conditions you signed.

The mortgage within your overall financial picture

A mortgage is probably the largest debt you will ever have, but it is one component of your financial situation, not the entire picture. Before making the decision, it is worth being clear about the impact each scenario would have on the whole:

• How much would be left each month for saving and investing with the highest possible payment?
• Do you have an emergency fund to protect you if rates rise and the payment goes up?
• How does the tax deduction for a main home (only for homes bought before 2013, if it applies to you) affect your comparison between options?

If you keep an orderly record of your accounts, this analysis becomes much simpler. You can see at a glance how much comes in each month, how much goes out in fixed expenses and how much headroom you have before committing to a specific payment.

How does Cuéntamo help with this?

A mortgage is a long-term recurring expense: an amount that leaves your bank account every month for decades. Cuéntamo lets you record it as a recurring expense with the current payment amount and automatically project its impact on your future balance.

If you have a variable mortgage, when the bank notifies you of a rate revision simply edit the recurring item with the new amount. The balance forecast updates automatically for the following months, so you can immediately see how that rise (or fall) affects the rest of your savings plan.

In Cuéntamo’s Net Worth module you can also record your outstanding mortgage balance as a liability and the value of your home as an asset, and track the evolution of your net worth over time. That way you see not only what the mortgage costs each month, but also how much you are reducing your debt and growing your real wealth.

Cuéntamo is built for household finances: your accounts, your balance forecast and your net worth in one place. Try it for free at cuentamo.com.

Frequently asked questions

What is the Euribor and how does it affect my mortgage?

The Euribor is the rate at which European banks lend money to one another. If you have a variable mortgage, the bank uses it as a reference to calculate your interest rate at each revision: Euribor + a fixed spread agreed when you signed. When the Euribor rises, your payment rises; when it falls, your payment falls.

Which is better, a fixed or variable mortgage?

There is no universal answer. Fixed is better if you need certainty about your monthly payment or if the fixed rates on the market are competitive with variable. Variable can work out cheaper in low-rate environments, but it means accepting the risk that the Euribor rises during the life of the loan.

How much can my payment rise with a variable mortgage?

It depends on the outstanding balance, the remaining term and how much the Euribor rises. With a 200,000-euro mortgage over 25 years and a 0.7% spread, the difference between the Euribor at 0.5% and at 5% is over 450 euros per month. That is why it is worth simulating the worst-case scenario before signing.

When does a mixed mortgage make sense?

When you want protection in the first years (tighter income, higher expenses) and are willing to take on the variable rate risk once that period is over. The initial fixed period acts as insurance during your most financially vulnerable years.

What should I check beyond the interest rate?

Early repayment fees, mandatory tied products (insurance, accounts, funds) and the total cost of those tied products. Sometimes a nominally better interest rate comes with products that make the real cost higher than a seemingly worse offer.

This article is for informational purposes only. It does not constitute financial advice. Before signing a mortgage, consider consulting an independent financial adviser or credit intermediary.

This article is checked against official sources and reviewed periodically. If you find anything out of date, write to us at [email protected].