Mortgaging a house is one of the most important financial decisions that a person assumes throughout his life, which is why we must give it the importance it deserves and stop to value all options. In order to be able to make this decision diligently, you should familiarize yourself with a series of concepts that facilitate the choice of the type of mortgage that suits the needs of each client.
The mortgage concept itself: we should not confuse mortgage with a mortgage loan
When you request a loan from your bank, the bank may ask you to establish a mortgage. We speak, then, of mortgage loan. The mortgage is a right that is oriented to guarantee the fulfillment of an obligation subjecting some good to the fulfillment of that obligation. If the obligation is not fulfilled, the creditor has the right to sell the property to satisfy, at least in part, the debt. It is a guarantee for the creditor.
It is very important to understand that there can be loans without a mortgage and mortgages without a loan. A bank can grant you a loan without a mortgage, if you consider other types of guarantees sufficient. And not all mortgages have to guarantee mortgage loans. The payment of any kind of debts can be guaranteed with a mortgage
Mortgage credit: your bank can not only offer you mortgage loans
Although colloquial speech uses credit as a synonym for a loan, a mortgage loan is not the same as a mortgage loan.
A mortgage loan has conditions, particularly in terms of the amount borrowed, preset. Meanwhile, a mortgage loan is granted up to a certain amount, but you will not have to dispose of that amount in full immediately. Mortgage credit offers greater flexibility, but this will normally be associated with a somewhat higher cost.
The term of the mortgage: Forget about “a lifetime mortgaged”
When we talk about mortgages it is very easy to hear the expression “a lifetime mortgaged.” But the important thing in a mortgage is the first years. You can check it yourself through the mortgage calculator. As we increase the term of the mortgage, the bank will grant us a larger amount. However, that additional amount that the bank will grant us will be smaller and smaller. Otherwise, we would only have to request a mortgage with a perpetual term for an infinite loan to be granted.
The reason is very simple, it is worth more money that you will return soon than it will take a long time to return. We value today’s money more than long-term money, hence interest on loans is stipulated. For example, if you are told that if you prefer to collect a cash within 500 years or a small amount today, you will surely choose the small amount today.
The important thing is the first years but, to what extent? That depends on interest rates. The higher the interest rates, the less they will lend you today in exchange for the fees you can pay within many years. Therefore, extending the terms can be a solution in times of low interest rates. And don’t forget two important “bites” to the effort to make for the mortgage payments of recent years: inflation and economic growth.
For inflation you will be renounced to lower consumption by having to pay the fees of recent years, simply because everything will be more expensive.
Thanks to economic growth, if the world is progressing materially, it is most likely that its material possibilities of life (or those of its heirs) are better and the payment is less effortless.
Subrogation of the mortgage, a mortgage is not a chain attached to a bank
You can reach an agreement with your bank and, later, you can appreciate that another bank could offer you better conditions in some sense. The mechanism to do so is the subrogation of the mortgage loan. The surrogacy is regulated by the law. It supposes the change of bank by decision of the client debtor of the loan. The law gives your former bank a period of 15 days to match or improve the conditions proposed by the bank that intends to subrogate in its place. It has some costs, such as notary, agency, registration or bank fees. It should be assessed if the change compensates for all these costs.
Foreclosure of the mortgage: the agreement can be changed
A novation means changing any of the conditions that your mortgage has. And it means doing it with the same bank. Logically, it is carried out by mutual agreement between both (creditor and debtor). The novation has the advantage, compared to subrogation, which may have a somewhat lower cost, because it allows some minor modifications to be made. Finally, it is a change in what has already been agreed. But, for this, you have to reach an agreement with your bank.
Object of the mortgage: you can mortgage much more than the house
They can be subject to mortgage all kinds of real estate, and even certain rights that fall on them. Therefore, you can mortgage other types of buildings, in addition to housing. Thus, for example, you can mortgage a business premises. And you can even mortgage properties that are not buildings, such as rustic farms. But, in addition to the real estate mortgage, there is a movable mortgage. The movable mortgage can only fall on commercial establishments, aircraft, cars and other motor vehicles, as well as trams and rail cars of private property, industrial machinery and intellectual and industrial property.
The subjects of the mortgage: debtor’s assets are not always mortgaged
In general, when we think of a mortgage, we think that someone mortgages the house you just bought to be granted the loan with which you paid it. Yes, it is a very common case, but not the only one. It may happen that the debtor and the owner of the mortgaged thing are different people. For example, that is the case when someone mortgages a good (let us take their house as an example) so that a family member is granted a mortgage loan.
The reverse mortgage: when you get paid every month for having a mortgage
Although it seems that it has a trap it does not have it. The reverse mortgage is another form of mortgage. In this case it is aimed at people over 65 years old or large dependents or severe dependents. It allows them to enjoy an income without having to part with their house. With the reverse mortgage the client receives, in exchange for mortgaging his house, an amount every month. The bank will not claim the debt while you live. It will be your heirs who can decide what to do after death.
They have several options. They can pay the debt with money they have and keep the house. Another possibility would be to contract a mortgage to pay off the debt. They could also sell the house to pay off the debt and keep the rest. If you do not pay the mortgage will be executed.
The variable rate, a protection against changes in the value of your debt
This may seem very strange. In a fixed rate mortgage, it seems that everything is predictable and defined in advance, there are no risks. Well, it’s not like that. In a fixed rate mortgage, what is preset in advance is the amount of each installment.
What is worth a fee today that you have to pay, within 10 years will depend on the interest rates. If interest rates are very high with small amounts today, we will be able to get amounts equivalent to what you have to pay within 10 years. That is why they would lend little money today in exchange for a commitment in 10 years with high interest rates.
If, on the contrary, interest rates are low, a large amount will be needed to reach within 10 years an amount equivalent to what you have promised to pay on that date. That will happen with each of your fees, not just with the one you pay within 10 years. As interest rates rise, lower value will have today; As they go down, the more value they will have.
You will wonder how these variations affect you. If you have a fixed rate mortgage and interest rates fall, you could pay a much less high amount. If interest rates rise, you win, but that is a risk that the variable rate protects you. It also represents a lower risk for your bank. The value of your mortgage loan portfolio fluctuates less by having a hedge against changes in interest rates.
The Euribor: more than an interest rate for mortgages
It is an interest rate to which in mortgages at a variable rate a difference is added and from which it is the type that will end up charging you for your variable rate mortgage. But the Euribor is not the type of mortgages, it is more than that. It is an interest rate that is calculated as an index of the rates at which banks lend each other. There are several periods, but they are short term.
Mortgages in foreign currency, a coverage option when you charge a lot in another currency
Some people who live in a country charge an important part of their income in foreign currency. That is the case, for example, of those who work seasonally in a country with another currency. In the event that that currency loses value, if you do not contract a mortgage in that currency, you may have trouble paying your mortgage, because your income taken to euros (or to the currency of the country where you live) will be worth less. If your debt is also worth less, you will be very relieved. Keep in mind that if you do not get a significant proportion of your income in foreign currency, hiring a mortgage in foreign currency is a source of risk.
Mortgage statistics: the instrument to analyze trends in mortgages
To analyze mortgage trends in Spain, a good instrument is the INE Mortgage Statistics. You can know how many farms are mortgaged; for what value; to what extent homes, other urban farms or rustic farms are mortgaged; if it is done at a fixed or variable rate; in how many the creditor is a bank and in how many other type of entity; the novations and subrogations that occur, etc.
And most importantly, it allows to know its evolution over time and the distribution of data by territories. A brief examination, even superficial, of these statistics, will allow us to observe that the reality of mortgages is much more varied and surprising than is usually thought.