Monthly Archives: April 2019

The spread of fixed rate and variable rate mortgages

The mortgage spread is the difference between the reference rate for that loan and the rate actually paid to the borrower by the bank. In fact, it is the bank’s profit: the mortgage is structured like any other loan, thus providing for the granting of a loan amount against a repayment schedule in installments and the recognition of a certain interest rate . Obviously, the mortgage then provides for particularities, such as the institution of the mortgage (even if traditional loans also require certain guarantees).

The interests are therefore a fundamental component in the disbursement of a mortgage

The spread is a concept that in recent years has found much space in the media and is now better known by many Italians. Even if it was not a question of mortgage rates, the much publicized spread worked in the same way: it was always the difference between a reference rate (in that case the German ten-year government bond) and the one paid by the Italian State (on BTPs, a type of government title). In the same way, the borrower finds himself paying a difference between a rate conventionally chosen by the banks and that actually provided for by the contract.

This difference remains fixed for the entire duration of the loan

This difference remains fixed for the entire duration of the loan

Regardless of the type of interest rate chosen by the consumer, the profit required by the bank will always remain the same. We must not confuse this forecast with the difference between the fixed and the variable rate: in the first case, the rate remains fixed on all mortgage payments, while in the second it changes according to the trend of a given reference rate (such as the EURIBOR or the ECB rate). However, the spread established at the beginning of the contract will always remain the same: if the rate is fixed, then the interest to be paid will also remain the same, while if the rate is variable the changes will follow, but always with the same spread.

Simplifying this concept, assuming a blocked spread, a fixed rate would always be calculable as Eurirs rate (the one used for these calculations) + spread: the result will always be the same for the entire duration of the loan, because the Eurirs remains fixed. On the contrary, for a variable rate loan, the calculation to be made is Euribor (or ECB rate) + spread , with the result that will vary depending on the reference rate fluctuations. To find out anyway the amount of the mortgage spread requested by the main Italian banks, connect to this portal.