Many people take out a mortgage to buy property, and being well informed is key in making such an important financial decision.  

After years of renting, David and Paula want to buy a home. They’ve settled on a great location and talked about what they’d like it to have: a garage, two bedrooms and a large living room. They’ve found the perfect place online that’s within their budget. Now they need answers to questions they have about mortgages. If, like David and Paula, you’re also thinking of taking out your first mortgage, this article by Finanzas para Mortales (Finance for Mortals) will help. 

What is a mortgage?

It’s a financial product banks offer to customers to help them buy property. Essentially, customers ask the bank to loan them an amount of money; if approved, they will commit to paying it back (with the agreed interest) over a specific term. 

Unlike other financial products, a mortgage guarantee protects the lender (the bank) against default and hands ownership of the property to the bank.  

What makes up a mortgage agreement?

We begin with the mortgage loan or loan principal: the sum of money the bank lends to a borrower to purchase a property. It will always be equal to, or less than, the property value. Find out what makes mortgages different to a credit facility by reading this article by Finanzas para Mortales.

Next, we have interest: the price the bank charges for borrowed money.  Interest on mortgages can be fixed, variable or blended.

Finally, the loan agreement will stipulate a term in which the borrower must pay back the loan principal and interest. The borrower should be mindful of “affordability”, i.e. the financial burden they can take on. Spending beyond their means (expenses, savings, salary, etc.) could lead to over-indebtedness. 

In Spain, banks use the French method to calculate the monthly repayment instalments the customer will make over a given period. They are usually more costly in the early years of the loan term, when interest is significantly higher than at the end. 

Let’s go back to David and Paula, who want to calculate their mortgage quickly and simply with an online simulator like this one by Santander España. They have to provide such information as the price of the home; whether it’ll be their primary or secondary residence; if it’s a new-build or lived-in; their net monthly income; how much they need to borrow; and the term they desire. Then they have to mull over the mortgage conditions: instalment amount, maturity date and repayment method. 

What types of mortgages are there?

We categorize mortgages by their type of interest rate. Benchmarks set the average interest rate at which banks agree to loan money to each other and to third parties (individuals and companies). In Europe, the benchmark is the Euro Interbank Offered Rate (or Euribor).

The types of mortgage are:

  • fixed-rate: The monthly instalment paid to the bank does not change with average rate fluctuations. The borrower’s main benefit is always knowing how much interest to pay. 
  • variable-rate: Instalments comprise the fixed rate agreed with the bank plus the rate applied at each review. Its advantages include longer repayment terms and lower fees.  
  • blended-rate: a combination of fixed and variable. The borrower starts paying a fixed interest rate, which changes to a variable rate as time goes on. 

There is no generic answer to the question “Is a fixed- or variable-rate mortgage better?” Each borrower’s circumstances are different, and the mortgage they choose will depend on their preferences (with mortgage brokers, advisers and private bankers on hand to help).  

What do mortgage brokers do?

They mediate in the application stage to secure more favourable conditions than what the borrower would obtain if they negotiated directly with the bank. If the bank approves the mortgage, the broker will charge commission. 

Other players like private bankers take charge of customer service, answering queries about agreement clauses and helping with signing documents electronically, etc. 

Mortgage advisers show customers the best option among the many offered by the banks they work with. They assess the borrower’s profile, get to know their personal and financial situation and advise them based on their needs and preferences. 

Now that you know what a mortgage is, have a go at this fun test by Santander Consumer Finance

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