Before we dive into what are the best mortgage loan characteristics a better place to start is, what is a mortgage loan? In short it is a financial product whose purpose is to grant a certain amount of money, which will be used for the purchase or restoration of real estate.
It is considered to be one of the most sought-after loans for companies and individuals.
The particularity of home mortgage loans is that, in addition to the personal guarantees they require in any loan transaction, the mortgage loan lenders that grant them also require security interests in the payment performance of the transaction. In this case, the guarantee is the asset being mortgaged, which in the event of default, the title will automatically pass to the financial institution.
Characteristics and requirements of the mortgage loan
Mortgage loans have a number of peculiarities that differentiate them from any other credit operation. Some of them are:
All mortgage loans will be associated with a demand or current account in the name of the borrowers, in which the different fees to be paid will be collected.
With a security right, it is one of the safest lending operations for the lending bank.
Due to the large amounts granted, the repayment periods are longer and the interest rate for other types of loans is lower.
The maximum mortgage loan amount granted by the financial institution is usually around 80% of the appraisal value of the property.
The fee to be paid will be around 35% of the net monthly income of those who request it.
Before granting it, the entity will carry out a feasibility study on the borrowers’ ability to pay, which will require extensive documentation (ID card, tax return, valuation study of the property, simple property note, latest pay slips or VAT return, employment contract, etc.).
Types of mortgage loans
The interest rate is the price entities charge for lending their money. Banks may grant mortgage loans at a fixed, variable or mixed interest rate.
Fixed interest rate
The interest rate and therefore the monthly payment to be paid remain fixed throughout the life of the loan. The advantage of this method is that you will know in advance how much you will have to pay each month, without worrying about rate increases and decreases. As a disadvantage, a higher rate is usually set at the time of contracting than for variable-rate mortgages. Permitted repayment terms are also shorter; a maximum of 20 years is usually set.
Variable interest rate
The variable interest rate is reviewed annually or semi-annually (sometimes quarterly) and is adjusted to market conditions at that time. The advantage of this method is that at the time of contracting the initial interest rate is usually lower than that of fixed-rate mortgages and the option of longer repayment terms is usually offered, usually between 20 and 30 years or even longer. With a variable interest rate, you run the risk of having to pay a higher fee if interest rates rise, but you can benefit from a lower rate.
Various financial instruments are available to cover the risk of rate hikes. This means that, if rates rise, the bank will pay the customer the difference between what he has to pay and a certain monthly fee. However, they have their own risks: if the rates are lowered, it is the customer who has to pay the bank, and sometimes these amounts can be very high.
Mixed interest rate
In this case, a fixed interest bank mortgage loan rate is charged for an initial period (usually between three and five years) and then becomes a variable rate. It could increase or decrease the amount of the installment to be paid depending on the evolution of the interest rate of the reference used.
Mortgage Loan Requirements
Banks usually grant mortgage loans for a maximum amount equivalent to 80% of the appraised value of the property, provided that the installment to be paid does not exceed the borrowing limit of 30-35% of the net monthly income.
But there are other factors they consider important in determining your ability to pay, so they will do a feasibility study and require a number of documents that can be included:
- ID: Drivers License, State Issued ID, Passport or Birth Certificate
- Your Last Income Tax Return
- Your last two payslips if you are employed
- Copy of the employment contract
- Last VAT return if self-employed
- An appraisal report of the property
- Verification of registration (simple note)
- List of your assets at the time of applying for the loan (other property, cars, investments, bank accounts, etc.)
The monthly fee
The monthly payment is made up of the portion of the borrowed money you are repaying (principal repaid) that month, plus interest expenses. Depends on:
- The amount of capital lent
- The interest rate
- The deadline
- The method of calculation
Normally the installment is calculated using the constant amortization system modality, also known as the French system. It means that the total installment to be paid (amortized principal + interest) will always be the same during the life of the loan (except when the interest rate increases or decreases on variable-rate mortgages are reviewed), but the percentages of amortized principal and interest vary.
Interest is calculated by applying the interest rate on the principal outstanding at any given time. Therefore, in the first installments, you will be paying interest on the total debt. This interest will make up the majority of the total installment and you will only be repaying (paying off the debt) a small amount of the outstanding principal. But with each installment the outstanding principal is reduced a little, so you’ll be paying a little less interest the following month. Since the total installment is the same, it means that you will be repaying more with each installment. And so on and so forth.
There are several types of mortgage loans according to the interest rate. The conditions of the mortgage will vary according to the entity where we apply for the loan and also taking into account the purpose of the loan (purchase of our habitual residence, purchase of a second residence, improvement of the “subrogation” conditions, reunification of debts-consolidation, etc.).
To terminate the mortgage, it is not sufficient for the loan to have been repaid in full, but it must be recorded in the register since if the mortgage is not taken out it will continue to be listed as ‘alive’. In order to do so, the bank must agree to the cancellation and the costs are to be borne by the borrower.