Understanding your mortgage more clearly

Are you considering a mortgage but find it all rather confusing? Are you planning to become the owner of a property ? Congratulations, as we believe there is no better investment.
To do so, you will probably need to take out a mortgage with a financial institution.

What does this mean?

In practical terms, this means that an institution will lend you money at a certain interest rate, which you agree to repay monthly over a predetermined period.

What should you consider when choosing the loan best suited to your circumstances?

• Your repayment capacity

Before approaching a financial institution, calculate your repayment capacity yourself. This will enable you to attend a loan appointment well informed, giving you credibility and confidence. As a general rule, your repayment capacity is said to be a maximum of 80% of the sum of the amount you can save each month and your current rent.

Therefore, if you manage to save 1000€ per month and your current rent is 900€, your borrowing capacity will be equal to (1000+900=1900)/100*80= 1520€.
A bank also considers that you can borrow up to 50% of your net income.

• Fixed or variable rate?

The fixed rate:

What is it?

This means that you know the monthly and total amount to be repaid over a predetermined period.

When should you choose it?

This rate is chosen when rates are low at the time the loan is taken out.

Advantage ?

This type of rate provides security, as there will be no unpleasant surprises regarding your repayments. It also makes it easier to plan the budget you can allocate to your other expenses.

Disadvantage?

As the bank takes on more risk because it does not know how the market will develop, the rate is often higher than the variable rate.

The variable rate:

What is it?

Your loan is reviewed at each interval (every year, every three years or every five years) based on a statutory reference index. However, the worst-case scenario is that the rate becomes twice as high as the initial rate, so fluctuations will never be too significant.

When should you choose it?

When rates are high. You can then hope that they will fall during the repayment period.

Advantage?

If the variable rate is very low, since it can only double, the rate will remain low throughout the repayment period

Disadvantage ?

There is no certainty regarding your monthly repayment. If rates rise, your monthly payments will increase.

There is therefore no single right choice when it comes to interest rates. It depends on market conditions. In any event, it is advisable to request two offers: one with a fixed rate and one with a variable rate.
However, note that if you are offered a variable rate that is half the fixed rate, you may wish to favour it, as it can never more than double.
An example always makes things clearer:
If you are offered a fixed rate of 2% and a variable rate of 0.9%, favour the variable rate because, even in the worst-case scenario, it will never exceed 1.8%.

• Annual percentage rate of charge

To compare offers from different financial institutions objectively, it is important to have a common indicator. Looking only at the borrowing interest rate offered is not enough! This common denominator is the APRC, or annual percentage rate of charge. It takes into account all costs associated with the purchase (not only the interest rate): administration fees, insurance, etc.

Finally, bear in mind that an initial offer is very often negotiable. This is known as a discount based on the customer relationship. If you use the same institution for insurance, pension savings, etc., you will have a strong chance of receiving a better offer.

Now that you understand how a mortgage works, if you would like to learn more about current developments in the property sector, we invite you to browse our blog, which is packed with interesting articles. And if you would like to daydream a little about properties, view our available properties.