Before requesting a loan
Opening, cancellation and differential commissions are some of the concepts in play when requesting a mortgage. But, do we really know what they mean and how they affect us?
When we are looking for a mortgage adapted to our needs, we often concentrate on the interest and the repayment term without taking account of other factors of which we become aware too late. Concepts like differential, maximum term and commissions should no longer be the great unknowns of the mortgage world. Let us not forget that a good understanding of the factors that intervene in each mortgage loan can lead us to the ideal offer.
That is why we must keep the following factors in mind:
- The interest rate can be fixed or variable:
- Fixed interest: remains unalterable while the loan lasts. Thus, if the market tends to rise the buyer remains protected from the rise; but if the tendency is downward the buyer will not benefit from this. However, the majority of banking institutions do not normally contract this type of interest, since the average life of a loan is very long, which supposes a great risk both for the bank and for the consumer. To agree on a fixed interest rate, the institutions request short terms of repayment.
- Variable interest: the amount that the bank has to return will vary, depending on how the reference index changes.
- The two normal reference rates are the EURIBOR, the daily average of the interest rates of the most important banking institutions in the Euro zone, and the MIBOR, the average price or interest rate at which the Banks and Building Societies loan money on the money market (currently, it is only applied to loans taken out before the year 2000, although it has practically been substituted by the EURIBOR). Reference should also be made to the so called substitutive rate: when the reference indices disappear due to any temporary circumstance, all mortgages contemplate the so-called substitutive reference rate. It is not surprising that this can occur, above all when mortgages with terms of 20, 25 or 30 years are so common. That is what happened, for example, when the MIBOR stopped being used in Spain. This substitutive rate can be variable or combined.
- The differential is a profit plus that the bank possesses on the reference interest rate. The best price of a loan is established by the differential that the banking institution applies. Normally the reference values are taken year by year, although many banks apply the revision biannually.
- The AER (Annual Equivalent Rate) is the percentage reflection of the costs involved in the loan: interest, opening costs, etc.
- The commissions for total and partial anticipated repayment will be calculated with variable interest on the capital pending amortization, no being more than one percent.
- The opening commission is a percentage that is applied to the capital requested from the bank.
- The cancellation commission , unlike the opening commission, has maximum limits. If the interest is variable, the maximum limit will be one percent of the cancelled capital. If the interest is fixed, the maximum cancellation commission will be 2.5 percent.
- If the bank proposes contracting someinsurance, this can be whichever you wish.
- Someone making a request for a mortgage should not forget the valuation: the banking institution will request one to know the exact value of the property that it is going to mortgage and to make a safe offer of the amount that it will loan to the person interested in buying it. Generally, 80 percent of the amount of the valuation of the property is loaned, although there are offers that cover one hundred percent. And the person making the request must not forget that this valuation has a cost.
- Rounding consists in simplifying the calculations, increasing the gains of the banking institution. An example of this is in the reference interest rates: these come expressed with up to three decimals, so it is decided to round the percentage to reach simpler figures. However, much care should be taken with this, because it can be rounded up or down.