Mortgages: A complete guide before and after you apply

Introduction

This article will provide you with all the key information about mortgages in a simple and understandable way. We will cover the different types of mortgages, practical tips and tricks that will help you save money and avoid surprises with banks.

What is a mortgage?

A mortgage is nothing more than a loan that you apply for from a bank to finance the purchase of a property, whether it is a house, flat, flat, etc. Unlike other loans, in a mortgage, the property you buy is used as collateral. This means that if you are unable to repay the loan, the bank can keep the property.

Although this is not normally a problem, in exceptional situations, such as in the 2008 housing crisis, property prices fell, and some homeowners found themselves in the situation of losing their home and still owing money to the bank.

Factors to take into account when applying for a mortgage

Before you take the plunge and apply for a mortgage, it is essential to pay attention to four key factors:

1. Loan amount: Assess how much you really need to borrow.
2. Type of mortgage: Fixed, variable or mixed.
3. Interest rate: The cost of the money the bank lends you.
4. Repayment period: The time over which you will repay the loan.

Practical example

Imagine you have found the house of your dreams valued at 200,000 euros. The next step is to decide how much money you will contribute from your pocket and how much you will ask the bank for. Remember that, in addition to the price of the house, you will have to cover additional expenses such as notary, taxes, furniture, etc.

In Spain, the minimum that you will have to put up is 10% of the value of the property, although the most common is that you will have to put up at least 20%. This means that, for a house worth 200,000 euros, you should have 40,000 euros available.

Types of mortgages

There are three main types of mortgages:

1. Fixed-rate mortgage: The interest rate remains constant throughout the life of the loan. This protects you against interest rate hikes, but is usually more expensive.
2. Variable rate mortgage: The interest rate is linked to the Euribor, which varies over time, meaning that the monthly instalments can go up or down.
3. Mixed mortgage: It starts with a fixed interest rate for an initial period and then changes to a variable interest rate linked to Euribor.

What is the best option?

The choice between fixed, variable or mixed rate depends on the economic situation. If interest rates are low, a fixed-rate mortgage may be the best option, while if they are expected to fall, a variable mortgage may be more advantageous.

Interest rate negotiation

The interest rate you get depends on your bargaining power with the bank. Ask several banks or use online mortgage comparators to find the best deal. Some banks will offer discounts if you take out additional products such as insurance or investment funds.

The term of the loan

In Spain, mortgages usually follow the French model, which means that at the beginning you pay more interest than capital. As time goes on, the interest decreases and you increase the repayment of the borrowed capital. Therefore, if at some point you receive extra money and decide to amortise your mortgage, it is better to do it in the first few years to save more in interest.

Should I amortise my mortgage?

Deciding whether to advance the mortgage repayment depends on whether you can get a higher return by investing that money. If, for example, you can earn more by investing in the stock market than you pay in interest, there is no point in paying off the mortgage. On the other hand, if your money is sitting in the bank without making a profit, it might be better to use it to reduce your debt.

The influence of inflation

Inflation also plays an important role in this decision. If inflation rises faster than the interest on your mortgage, you will be gaining purchasing power. This is because prices and wages tend to rise with inflation, while the amount of your debt remains constant.

Conclusion

In short, choosing a mortgage is one of the most important financial decisions you will ever make. You should consider not only the interest rate, but also the repayment term, fees and the possibility of investing your money rather than prepaying it. With the right knowledge and good planning, you can save money and make the best decision for your needs.