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A mortgage is an agreement between a bank and a home buyer, which is intended to encumber the property with the obligation on the part of the buyer to pay back to the bank in monthly instalments the amount that has been lent, plus interest, over a stipulated period of time.
Thus, the buyer of the property, or debtor, will enjoy the property as long as the agreed monthly instalments are paid, but if this obligation is breached, the bank or lender will keep the property as security for the loan. The property is the guarantee that the obligation will be fulfilled.
A mortgage loan is an agreement where the obligations assumed by the debtor and all the conditions governing the loan are stipulated. This agreement must be registered in the Land Registry, which is the body responsible for establishing the ownership of real estate property in order to guarantee its legal security. These are the main elements of a mortgage loan:
- Principal. The principal is the total amount of money lent by the bank to the debtor, which the debtor has to pay back in regular instalments.
- Interest. The interest is the percentage of the money lent that the lender has to pay to the bank for the loan. Interest rates can be fixed or variable.
- Term. This is the period of time in which the lender has to pay back the agreed principal and interest.
- Mortgage collateral. The value of the property is the security for payment, which allows the bank or lender to keep the property if the debtor defaults.
Types of mortgages
A mortgage is an agreement between a bank and a home buyer, which is intended to encumber the property with the obligation on the part of the buyer to pay back to the bank in monthly instalments the amount that has been lent, plus interest, over a stipulated period of time.
Choosing the right type of mortgage is an essential decision when buying a property. There are three types of mortgages: fixed-rate, variable-rate and mixed mortgages. When choosing one of the three, it is important to bear in mind that they are linked to interest rates, and that these can go up and down during the years that the mortgage loan is in force.
Fixed-rate mortgages
Fixed-rate mortgages are tied to a fixed interest rate. This means that you will always pay the same amount, regardless of changing market rates and values.
Variable-rate mortgages
With variable-rate mortgages, the interest rate is linked to a reference rate, usually the Euribor, plus a fixed differential. Thus, when the Euribor value is lower, the mortgage payment will be lower, and when the value is higher, the payments will also be higher.
Mixed mortgages
It is a combination of the two previous ones. As an example, during the first five years of a mortgage loan you would pay a fixed monthly instalment, and in the rest of the years, a variable instalment depending on the interest rate set by the Euribor.
What type of mortgage to choose?
Choosing the right type of mortgage will depend on a series of factors, such as the financial situation of the property buyer, employment conditions, the amount offered by the financial entity as a loan relative to the value of the property (as banks normally do not finance 100% of the purchase, and the buyer has to pay the difference) or the years in which the mortgage is to be repaid.
Fixed-rate mortgages usually have to be repaid over a shorter period of time than variable-rate mortgages. Generally, banks offer fixed-rate mortgages for terms of 20 to 30 years; however, there are banks that offer variable-rate mortgages even for terms of 40 years.
However, if the buyer has a high income that allows repayment of the mortgage within 15 to 20 years, a variable-rate mortgage will be more convenient because the Euribor is usually lower in the first years of the mortgage. But if the buyer does not have a high income allowing to face a rise of the Euribor, the best option is to take out a fixed-rate mortgage for a term of 20 or 30 years at monthly repayments that remain unchanged.
What are the costs of a mortgage?
The formalisation of a mortgage loan involves a series of expenses, which are the following:
- Notary and Land Registry fees.
- Tax on documented legal acts.
- Expenses relating to the valuation of the property.
- Mortgage origination fee.
The sum of all these expenses is around 3% of the amount of the loan. So, for example, if we were to apply for a mortgage of 120,000 euros, to this amount we would have to add 3,600 euros.
Key factors to take into account before signing a mortgage
Two factors must be taken into account that set the limits on the amount of the loan and, consequently, the repayment period and the instalment. These are the appraised value of the property and the borrowing capacity of the loan applicant.
- Appraised value of the property. This is not the same as the purchase value of the property. The appraised value is the estimate that an authorised professional makes of the property in order to determine its real value. In no case may the maximum mortgage loan granted by a bank exceed 100 % of the appraised value.
- Borrowing capacity of the loan applicant. Before formalising a loan, banks carry out a study of the applicant’s financial situation to check if he or she is able to take on the debt. Ideally, the monthly instalment to be paid should not be more than 30 to 35 % of the applicant’s monthly income minus expenses, in order to be able to afford the loan. In addition, buyers should have between 20 to 25 % of the total value of the property in savings.
A mortgage loan is a very important commitment for the buyer, as the amount is usually very high and the duration of the loan very long. Therefore, before taking on a mortgage, buyers should make sure their financial capacity is sufficient for covering the debt and the related expenses.
If you have already made up your mind and want to buy a new home, at Sonneil we offer you the most exclusive properties near the sea.
