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Below we include information on several issues related to home financing.
Mortgages and interest rates.
Interest rates are key, given that, together with the mortgage term, they determine the total amount of the loan and, therefore, the monthly payment to be paid during said term. It is essential that you understand the different types of interest you may be offered:
• Fixed interest rate: the interest does not vary throughout the entire mortgage term. That is, if interest rates go up, you will not be affected, though if they go down, you will not benefit from this. For fixed-rate mortgages, the payment term is usually shorter than variable rate mortgages, a typical term being 12-15 years.
• Variable: subject to interest rate fluctuations. Generally speaking, for the first six to twelve months, an initial interest rate is fixed, which is then reviewed on the basis of the interest rate fluctuations. For these reviews of the agreed reference index (generally Euribor) a differential is added, which could vary between 0.40 and 1.50 points. This option allows you to benefit from the drops in interest rates, but you are also exposed to the risk of rates going up. In order to limit the inconveniences of both, there are "hybrid" finance products that aim to better adapt to your individual needs. There are three main formulas:
• Hybrid: a hybrid formula consist in negotiating a fixed rate mortgage for the first few years (three or five), and a variable interest mortgage for the rest of the mortgage term until it is fully paid. In this case, the mortgage conditions (payment term, commissions...) are usually similar to variable interest rate mortgages. The advantage of this option is that it allows young buyers to establish no-surprise conditions for the first years.
• Variable rate fixed payment: these are variable rate mortgages whose monthly payment does not vary. That is, you always pay the same every month, but if interest rates go up, you will have to pay more monthly payments. If interest rates go down, your debt also goes down, and therefore you will pay less monthly payments.
• Capped variable. These are mortgages for which a maximum limit is agreed on with regard to interest rates for a specific term (generally speaking, the first 10 years). Thus, in case of the interest rates rising excessively, this avoids the risk of having to pay a monthly fee that you cannot afford.
Mortgages and commissions
It is important to pay close attention to interest rates, the term, the mortgage amount, and the monthly payments, as well as properly calculating all commissions and fees that you will have to pay. If you are interested in getting a mortgage, you should study the following fees : origination fee, early repayment fee and transfer fee.
• Origination and application fees. These include all expenses incurred by the Bank when processing your mortgage contract. It is calculated as a percentage of the mortgage amount. Generally, the amount of this fee is charged upon signing the contract. However, it may be possible to come to an agreement with the bank to pay it in instalments throughout the mortgage term. This fee is included in the calculation of the APR(Annual Percentage Rate) or effective cost of the mortgage. Therefore, you should look at the TAE to compare offers from other banks, given that it includes all the fees that you will surely have to pay with your mortgage.
• Cancellation or early repayment fee. Applied by the bank should the client wish to pay back - partially or in full - the mortgage loan amount before the term has finished. Calculated as a percentage of the amount cancelled or paid on account. By law , early repayment fees have fixed maximum limits. For variable interest mortgages, the early repayment fee is limited to 1%, whereas for fixed interest mortgages, the fee tends to be higher. In this last case, you must be very aware that a very high early repayment fee will discourage you if you wish to amortize the mortgage in order to benefit from a possible drop in interest rates and, for instance, negotiate a new mortgage with another bank.
• Transfer fee. This fee is provided for in the legislation in force, which fixes it at 1% of the mortgage loan. It allows you to change your mortgage from one bank to another, with the possibility of varying the interest rate, and maintaining the same conditions with regard to term and amount pending amortization. The Bank must agree to this mortgage transfer.
These are, basically, the main fees attached to mortgage loans.
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