The contract
Amortization, proceeds and interest data are some of the aspects which must be included in the banks offer, once an appraisal has been carried out and the concession of the loan agreed. Let’s look into this a little more deeply.
Once the appraisal has been passed, we must get over the final hurdle: approval of the loan by the financial institution. If affirmative, the bank will issue a contractual offer –the binding offer, delivered in writing and which is valid for a period of 10 days. This binding offer will include all financial aspects to be later incorporated into the contract, which the client then has three days to examine before signing.
By now, the buyer will have sufficient information to know whether the offer will go ahead or whether it will be refused. If it’s accepted, the client must know what to include in the contract.
Loan proceedings
The contract must include the following information in this respect:
- Amount: capital which the bank is to lend to the client.
- Loan payment form: method in which the client is to repay the loan amount. This is usually done through a current account, though there are cases in which banks demand that the client open a specific account, which will accrue no commissions for maintenance, opening, etc.
Amortization
This is one of the aspects of most concern to the client. The contract must therefore specify this clearly and indicate:
- Dates: if established in advance, the contract will show the dates of the first and last payment. In the case of a variable-rate mortgage, the final payment date may be unknown as the repayment period fluctuates according to the interest.
- Instalments: if agreed in advance, the contract should specify the number of instalments, as well as the instalment amount and frequency.
- Early Repayment: must specify the start date to be able to perform said repayment, the amount owed by the borrower to the lending institution for making said repayment (to be distinguished between partial and total) and, if partial, the minimum amount and the method in which the amount or number of amortization instalments is to be altered.
- Extension of amortization period: the contract should specify the powers entrusted to the borrower to extend the period of amortization and the conditions by which they are made effective.
Interests
Some aspects which the contract should include with regard to interests are:
- Annual interest type applicable to the loan. It should also specify whether it is fixed or variable, and for a certain period or throughout the duration of the loan.
- Interest Payments: must specify specifying start date and frequency, simple payment form. Should also specify the method for collecting the full amount of interest accrued.
- Days of the year in case the interest calculation does not cover that accrued during periods outside the year, thus needing to convert the variable interest to daily.
- For fixed-rate interest: specify the total instalment to be paid by the client and the effective cost of the entire operation.
- For variable-rate interest: define, identify and adjust the interest type applicable.
Should also specify the limits of variation of the applicable interest and the minimum threshold for movement and fluctuation. Furthermore, the contract should include means for advising the borrower of the interest type applicable to their loan in each period and whether there is a procedure which the client may follow should they not agree with the calculation of the applicable interest type.
Commissions
There is not usually much attention paid to this constituent, despite the amount of paperwork that can originate from a mortgage. In reality, the contract must include:
- Initial commission.
- Cancellation commission and legal maximums.
- Other commissions: these apply to any other service provided by the financial institution and should be communicated to the Banco de España.
Borrower costs
All outstanding costs owed by the borrower must be detailed, including tax, appraisals, management costs, insurance payments, etc.
Other aspects
The contractual document should also make reference to other aspects:
- Early termination: the document will also include the specific reasons for which the bank may terminate the contract in advance.
- Late payment interest: interests which are added for any instalments left unpaid by the client. The contract should, in this respect, specify this type of interest or its method of calculation, as well as its method of payment and the basis on which it is applied.