Mortgages fill the economics pages of newspapers, open newscasts and are present in many of our conversations with neighbors and relatives. It is not something accidental: practically everyone uses this banking product to gain access to a home.
However, despite being quite common, it is common for us to have certain doubts about how a mortgage works. How are the monthly payment installments calculated? Is it possible to improve mortgage conditions after a while? Can we cancel the mortgage whenever we want or must we meet some requirements to do so?
From Sky Marketing we answer the different questions so that you understand how a mortgage works before applying for it.
How a mortgage works: most common doubts
What is a mortgage?
According to the Bank of Spain, a mortgage is a “loan whose payment is guaranteed by the value of a property”. This banking product allows the client to receive an amount of money (called capital) from an entity (a lender, generally a bank) in exchange for their commitment to return it, along with previously defined interest, through monthly payments (installments) and for a specified period of time (repayment period).
The property on which the mortgage weighs remains in the hands of the owner as long as the payment obligations agreed in the mortgage contract are fulfilled. If these default, the lender, as the creditor, keeps the property to sell it and collect the borrowed money.
How is the mortgage different from other loans?
Personal loans and mortgage loans (or mortgages) are similar although with an important difference: as the latter are guaranteed by a flat, house or any property, the bank considers that it runs less risk in the event of default than with a personal loan. In addition, mortgages generally have a lower interest rate, so they are usually more affordable than personal loans.
Why are mortgages registered in the Property Registry?
The mortgage contract is a document that serves to expose, in detail, the obligations of the debtor and the conditions of the mortgage loan. Within these conditions, aspects such as repayment terms, the amount of the installments, the interest to be paid, the amortization system, etc. are specified. This contract, in turn, serves as a mortgage guarantee: in the event of non-payment, the contract observes that the lender remains as compensation with the mortgaged property.
Taking this into account, the mortgage contract must be registered in the Property Registry in order to have value before third parties. That is, it is an action required by the lender so that, in the event of non-compliance, the corresponding lawsuit, the conviction and the auction of the property are carried out. Let’s say that the registry is the fundamental guarantee of the repayment of the loan.
What is the maximum percentage that is granted with a mortgage?
The amount to be granted in a mortgage depends on each entity. When requesting it, the bank calculates this maximum amount based on two aspects:
- The appraised value of the home. This is an expert and independent estimate of the market value of your home. It is always carried out by an entity supervised by the Bank of Spain, observing standard criteria such as location and condition of the flat, size of the home, etc. The appraisal report is key to knowing how a mortgage works since, depending on it, the bank limits the credit it grants us. This money will never be 100% of the appraised value: the amount will be up to 80% of it (60% in mortgages for second homes).
- The borrowing capacity of the applicant. That is, what is the monthly expense that a person can assume without posing a risk to the fulfillment of their obligation. To calculate the debt capacity, financial entities carry out a study of the applicant’s income and expenses. Ideally, so that the bank does not detect risk in the operation, the monthly fee should not be greater than 30-35% of your monthly income. Therefore, before requesting a mortgage, it is recommended to have savings to cover around 20-25% of the appraised value of the home and up to 10% for related expenses (interest, management, commissions, etc.).
How is the monthly mortgage payment calculated?
To understand how a mortgage works when calculating the monthly payment, you have to take into account many factors, including:
- The total capital granted. It will vary depending on the appraised value and the borrowing capacity of the applicant.
- The interest rate. This mortgage index added to a differential, is what tells us the percentage of interest to be paid on the mortgage. In the market, there are mortgages at a fixed rate (the installment and interest do not vary throughout the loan), at a variable rate (made up of the value of the reference index (Euribor), plus a fixed spread; or mixed (an interest is applied fixed in a period and variable in the rest of the loan).
- Repayment term. It is the time that the mortgage lasts. In Spain, some entities grant mortgages up to 40 years. The longer the repayment period, the lower the monthly installments, but the more interest to pay.
- Grace period. In some mortgages, the grace period is the time during which the client only pays interest, leaving the principal payment (amortization) for later. In this way the monthly fees are lower.
Can I improve the conditions of a mortgage?
When you sign a mortgage, you make a commitment for a long period of time. However, over the years it is possible that our situation is different and that we are interested in changing the conditions of our mortgage. We have two ways to do it: novation and surrogacy.
How are novation and mortgage subrogation different?
The novation allows to re-negotiate the conditions of the mortgage with the bank to achieve a decrease in the interest rate, a capital increase or the repayment period, and even a modification of the ownership of the mortgage.
The subrogation, meanwhile, involves negotiating with another entity and only serves to improve the interest rate and the repayment period.
The main difference between the two is that for a novation you will negotiate with the same entity while for a subrogation you will do it with another bank. Also, its cost is different. In fact, many times subrogation is a good option because it is cheaper than canceling the mortgage and formalizing a new one.
How do you cancel a mortgage? Can I do it whenever I want?
To pay off a mortgage, in addition to paying the last installment, it is necessary to notify the Property Registry that there is no longer any debt with the bank. You must contact your bank, the Registry and a notary public to prepare the corresponding cancellation deed, the expenses of which you must bear. This procedure is not mandatory (the Registry itself cancels the mortgage contract 21 years after the payment of the last installment), but it is necessary to sell that property if you want to request a new mortgage loan and want to put said home as collateral or in case surrogacy.
You can cancel the mortgage whenever you want, as long as you have finished paying the last installment or that you have enough money to finish paying the mortgage at that time.
Now you know how a mortgage works. If after solve these doubts have further questions, do not hesitate to contact us.