What is the fixed rate
The fixed rate, on the other hand, is established in the loan agreement and remains constant for the entire duration of the loan. It has the IRS as a benchmark. Clearly, the certainty of the fixed rate and the consequent renunciation of any risk of fluctuation has a cost; in fact today the fixed rate costs 2 or 3 points more than the variable one. The interest rate is constructed using two elements:
The term spread means in a specific sense the difference between money (sales) price and the letter (purchase) quotation and in a more generic meaning is the price between two values. The bank buys the money to be loaned to the borrower by the Bank of Italy and pays it at the cost of the reference rate bank. He sells this money back to the borrower by applying a spread that consists of his gain. If the reference rate bank may be subject to fluctuations, the spread is fixed.
Reference rate bank index and is subject to changes
The variable rate, is anchored to the reference rate bank index and is subject to changes; depending on the fluctuations of the reference rate bank itself, it can therefore increase or decrease, with the consequence that the monthly payment can increase or decrease. Should this happen, the bank will recalculate based on the residual debt of the amount of the remaining installments. As an alternative to the increase or decrease in the value of the installments, some credit institutions place a particular type of contract known with the name of banks. It provides that instead of increasing (or decreasing) the value of the installment, increases (or decreases) the repayment period, maintaining the same constant rate. In other words, a change in the reference index does not affect the amount of the installment which remains constant, but determines a contraction or expansion of the repayment period. As an example, if the installment is set at 500 USD for 20 years and the reference rate bank increases by an X value, the monthly quota value remains unchanged, but the period is extended to 20 years and 3 months or 21 years or otherwise how many monthly payments are sufficient to cover this variation. This contract formula has a slightly higher cost than the standard variable rate. In any case it applies for periods not exceeding 25 years. If the increase implies a periodic change exceeding the years that it takes to reach the 30 repayment, the excess debt will constitute a sort of maxi-final installment that the customer can pay off or in a single solution or ask the institution lender to defer it in one month.
Cost of the money that the bank in turn pays
The reference rate bank is the cost of the money that the bank in turn pays to the interbank circuit (managed by the Bank of Italy) to procure the money. It is recalculated periodically depending on its expiry. There is therefore a one week reference rate bank as a 1 year one (which are the extremes). Generally banks use reference rate bank at three months or six months. The time difference indicates its volatility. If the interest rate is anchored to the reference rate bank at six months, it means that for the next 6 months, it will remain unchanged. Once this deadline has expired, the index is redetermined by the MID (interbank deposit market) and consequently the interest rate will also be redefined for the next 6 months.
The Reference rate bank (or IRS) is the non-indexed cost of money. It has a price depending on the maturity. Having the peculiarity of guaranteeing an interest rate stability for the duration of the loan repayment, it has a higher price than the reference rate bank. It is organized for 6 months. Moreover its cost varies depending on the duration. So the 10-year Reference rate bank has a higher price than the Reference rate bank at 5. Both reference rate bank and IRS can easily be updated on any financial newspaper. The circuits for controlling the financial situation of a person most used by banks can be traced to two.