In the EUROZONE, on the average it is most cost-efficient to get a mortgage (or any consumer loan) bound to the EURIBOR reference rate, plus a margin that is specific to the customer and bank. This ensures that the loan costs only as much as necessary, determined based on European Central Bank rates, and it is straightforward to get the quotes on just the margin from different banks. This is how most mortgages are done in Finland, and today's average margin is well below 0.5 percent. Then a major question remains: to which reference rate should I bound the mortgage to? Probably the most common option in your country is with the 12 month EURIBOR, but there are better options. In Finland, 3 month and 1 month rates are common as well, and this service shows how much the difference is and why shorter (1 month) rate is better for you.
Short answer: If we compare the 1 month, 3 month and 12 month EURIBOR reference rates, the shortest - EURIBOR 1 month - is the cheapest.
The longer answer is presented on this page, complemented by graphs calculated from historical rate data and a calculator service. First I must warn you that it is impossible to see into the future, so nobody can say what reference rate will be cheapest for a given mortgage over its term. Moreover, short reference rates mean that the interest part in the repayment amounts will change more often, which means that you need more buffer in your wallet to be prepared for changing base interest rates. You may find that basing your variable interest rate loan on a fixed monthly payment overcomes this problem.
Note especially:
In a normal loan e.g. a mortgage, the principal is decreasing as you make repayments, so towards the end of the loan period, the share of interest in the repayments goes down. Therefore fluctuating reference rates at the end does not affect the averaged rate as much. This weighting has not been taken into account in order to keep the calculations simple. The graph corresponds to a Bullet-type loan, where only interest is paid during the lifetime of the loan.
The graph is being updated weekly.
Click on the graph to see a larger version of it. X axis shows time, Y axis the daily rate in percent.
In the short term, the exact date you withdraw your mortage may have a large impact on your interest expenses, as the rate for the next whole period will be determined based on that date. With this calculator, you can try what the interest expenses would have been for a period with different EURIBOR reference rates. To simplify the calculation, it has been assumed that the principal is not repaid at all before the mortgage term ends, but just interest is paid. Usually mortgage principal is amortized as part of the monthly payment, and therefore the share of the interest is declining towards the end of the term.
Notes about the calculator: EURIBOR rates have been calculated only since the beginning of year 1999. New rates are automatically retrieved once a week. The calculator will not work for parts of the loan older than 1999 and newer than the current date. If there is no available rate for a payment date, the next rate and not the previous one will be used. This does not matter much in practice. With EURIBOR 12 month, each month will have the same interest component (yearly expense divided by 12), which means that the yearly interest is correct, but the components for each month are identical. Normally they would be calculated based on the number of days in the month.
In general, for long mortgage terms it holds as for other investments matters: higher risk brings higher yields. Here risk means e.g. volatility in stock portfolio worth and volatility in the interest part of mortgage payments, that is how often and by how much the values change. Banks pay a lower rate for a savings account than can be had by investing in stocks, but the daily value of the latter will be much more volatile. In the long term however, stocks are held to grow most in value. When a bank pays a fixed interest on a savings account, it will take the risk to bear, but will charge the customer for it, evident as the lower interest.
The same holds for mortgage reference rates. Normally the interest rate for a mortgage bound to a 3-month EURIBOR rate will be updated every 3rd month, while the one bound to a 12-month rate will be updated only every 12 months. In the latter case, the customer will bear a lower risk - knowing his interest payments up to a year in advance - but will pay for this: over several years, EURIBOR 12 months has been higher than EURIBOR 3 months on average.
So if you don't live from "hand to mouth" and can tolerate repaying a mortgage with an interest varying by 3 months or even 1 month, you can talk with your bank about binding your mortgage to a short rate. If you don't like this variability, it may be an option to combine fixed payments with this short rate.