In the variable every 5 years track, the rate is fixed for 5 years and then reset according to a predefined anchor. After the reset it is fixed again for 5 years, and so on.
How is the new rate calculated?
New rate = the anchor value on reset day + the margin set at signing.
The margin is fixed for the whole life of the loan, so it is very important to negotiate it. The anchor changes with the market, usually according to the yields of government bonds. What are anchor and margin?
Linked or not linked?
There is a variable-every-5 track linked to the CPI and one that is not linked. In the linked one the principal is adjusted to the index (What is the CPI?); in the non-linked one it is not. The rate on the non-linked track is usually higher.
Exit points: the big advantage
On the reset date you can repay the track without a capitalization fee. This gives flexibility: if the new rate is not good, you can refinance or repay.
Advantages
- A starting rate that is usually lower than the non-linked fixed track.
- Flexibility at the exit points.
- It counts as a "variable" component and helps balance the mix.
The risk
After 5 years the rate may rise, and you do not know in advance by how much. So this track suits part of the mix, not all of it. How to build a mix
Good to know
Under Bank of Israel rules, a track whose rate changes more often than once every 5 years is considered "variable." Only tracks with a rate fixed for the whole period count toward the mandatory fixed third. The one-third fixed rule