What is a mortgage?
A mortgage is a loan for the acquisition of a home or other property and is, at the same time, a commitment to pay on your part.
Normally it is conceded by a banking institution that, if you do not meet the payments established, would take possession of your home or would auction it directly.
When applying for your mortgage, you will need to provide the following information:
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The requested amount and repayment term: The most common terms for the repayment of a mortgage are 5, 10, 15 and 20 years, although it can be up to 30. However, we recommend that you do not extend the repayment term for your mortgage as this will increase the amount of interest you will pay.
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Instalments: You can pay the mortgage each month or in the period that you agree with the financial institution (months, quarters,...). Moreover, the amount to pay can be fixed every month or vary with time (variable instalments).
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Interest rates: The three most common types are:
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Fixed interest: The advantage of this mortgage is that the instalments are invariable, regardless of rises and falls in interest rates. The terms of repayment are normally from 10 to 20 years.
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Variable interest: The interest rate of your mortgage will be reviewed periodically to your benefit or detriment, depending on the international economic situation. This revision is made by adding a differential to the reference index (see
reference indexes) that has been established in the mortgage.
This can be advantageous over fixed interest for the first six or twelve months, but after this time a fluctuation period starts.
The repayment term is usually prolonged, and may extend to 35 years.
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Combined interest:This is a fixed interest for the first years (according to what is agreed with the banking institution this can be of two, three or up to ten years) and variable for the rest of the mortgage repayment time. We advise you to keep track of the reference index that will be applied to the rest of the loan, as well as to the forecasts of the experts for this index.
What can I do if interest rates go down?
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If the financial authorities lower interest rates and you want to benefit, you can renegotiate your mortgage with your bank or building society, making a
novation. You may also take the opportunity to rearrange the repayment terms for your loan. The costs of a novation depend on whether or not a new one is necessary
public deed.
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If you do not reach an agreement with your bank or building society, you may request mortgage simulations from other financial institutions and, if any should interest you, you can request to change banks. This is called
subrogation. This process, however, is more complicated and more costly than novation and you must weigh up if it is worth while. It is a matter of calculating the saving you would make and subtracting the costs. To proceed with subrogation you have to make a binding offer to the banking institution that interest s you (you will only be able to modify the interest, never the term of payment). Likewise, you will have to cover various costs: cancellation, opening, administration, notary and registry.
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Annual Equivalent Rate (A.E.R.): This is calculated based on the annual interest and mortgage costs, and allows us to compare the interest rates offered by different institutions, as long as they are of the same type (do not compare fixed with variables interest rates) and the frequency of revision in the case of variable and combined interest rates also being the same.