Concept of Mortgage
A real right that encumbers real property and is normally used to obtain the necessary financing for its purchase (although movable property can also be mortgaged). The mortgage is registered in the Land Registry.
The property remains in the hands of the owner as long as he fulfills his obligations, otherwise, the creditor can make the sale of the property to collect the money he lent.
Difference between credits and mortgage loans
The contract constituting a mortgage must be registered in the Land Registry in order to possess value for third parties. In the event that the borrower defaults on his payments, a lawsuit is filed, a conviction is handed down and the property is auctioned off. Thus, as a contract, a mortgage only imposes an obligation on the debtor and is regulated in accordance with the law.
Things to Consider in a Mortgage
The three most important aspects of a mortgage are: the principal, which is the money lent by the bank and is usually less than the price of the property to be covered in a possible auction; the interest, which indicates the extra percentage that must be paid to the entity that granted the loan and which can be fixed or variable; and finally, the term, which is the time it takes to repay the principal.
The legal process by which real estate is lost is called foreclosure. To get there, creditors must notify the property owner of their intention to auction off the property. In case of a complicated situation, it is advisable to negotiate a quick sale of the property with the entity that lent the capital.
Types of Mortgages
Mortgages can be classified according to various aspects: interest rate, by the type of instalment, the type of property being financed,…
Based on the interest rate:
Fixed-rate mortgages. When the interest rate does not vary throughout the agreed mortgage term. The instalments are constant throughout the life of the loan. It is an interesting alternative if the agreed fixed rate is attractive enough to link us to the bank for decades to come; as we have very high subrogation costs (compensation for interest rate risk that can suppose 4% or more), we must carefully analyze the conditions before signing.
Variable rate mortgages. Monthly payments are constant during each review period, changing based on the mortgage reference rate when interest is reviewed. In Spain the majority of loans are of this type, with a repayment system of constant or French installment and variable rate.
Mixed rate mortgages. There may be mortgages that combine a fixed rate with a variable rate. A percentage of the interest would vary depending on a reference (normally the Euribor) and the other would be an agreed fixed interest rate.
Depending on the type of quota:
The most common mortgages have a constant instalment during the interest rate revision period (French amortization system). The instalment is recalculated every year or six months (Bank of Spain simulators are very useful for making this type of calculation), usually on the basis of the evolution of the benchmark plus the applied differential. The monthly instalment is made up of interest and amortisation, which reduces the outstanding capital; in the first few years the interest portion is very high and the amortisation portion low, changing this proportion as the years go by.
Armoured instalment, which despite being at a variable rate keep the instalment constant throughout the mortgage, varying the term. If the interest rate increases, instead of increasing the monthly payment, what increases is the term; the opposite happens if the interest rate decreases.
Final instalment, in which a percentage of the outstanding debt is paid in the last instalment (over 30%). The resulting instalment is lower than with the French system, but we have to bear in mind that we end up paying much more interest, since during the entire term of the loans interest is applied on the final instalment not amortized, in addition to the fact that at the end of the mortgage you have to have saved that amount to pay off the debt completely.
Interest only, very used by certain foreign nationalities, in which during the whole life of the mortgage no capital is amortized and only interest is paid (lack of capital). It would be a kind of rent but with the risks and advantages of being an owner (in relation to the increase or reduction of the price of the house). When the loan ends, the outstanding debt is the same as when it was contracted, with the client having to pay the total to the bank or sell before that time occurs.
Increasing quota, in which the quota grows a fixed percentage each year (normally 1 or 2%), apart from the normal variation of variable rate of each revision. At first you pay less than with a constant rate, but at one point the rate grows year by year in relation to the French system.
According to the target client they are aimed at:
Mortgages for young people. Financing on more advantageous terms than those on the market in general, for customers under 30 or 35 years of age. Depending on the competition in the market, this type of financing, differentiated according to age, may or may not exist.
Mortgages for non-residents (second homes of residents abroad). Given that the client does not reside in Spain, the concession criteria are stricter and savings are usually required to cover expenses and 50% of the purchase price of the property.
Those reserved for certain groups: mortgage loans for civil servants, aviation personnel, employees of large companies, etc.
According to the type of property being financed:
Bank flats mortgages, when the property being financed comes from the portfolio of properties awarded by a financial institution, usually by auction or dation in payment agreement with clients who have not been able to pay their loan.
Mortgages for public or private VPOs (social housing). As a particularity to mention that they cannot be sold at market price, but for the stipulated legal value (after a few years they can be disqualified).
Mortgages on urban goods and on rustic goods (if the house is duly legalized).
Land mortgages. Normally to finance a land for development and build on it.
For the purchase of a first home or habitual residence. The best mortgage offers focus on this type of guarantee, as it is the loan with the least arrears in the system.
To finance a second home, when the client has already bought his family home. It is possible that we are required to mortgage both houses, if we request a high percentage of appraisal.
Types of mortgage loans according to their nature:
Subrogation of developer loan. When we assume the mortgage loan that the financial entity granted to the developer who sells us the new work.
Subrogation of part creditor or mortgages for change of bank. It is the way to improve the conditions of our mortgage, changing it from one financial entity to another.
Reunification of debts, going on to pay a single mortgage payment that unifies the old loans and debts.
Reverse mortgage, in which the elderly owner who needs to complete his pension mortgage his home free of charge in exchange for a monthly income.
Foreign currency and multi-currency mortgages. They are a very risky product, as we may owe more money over the years despite having paid many fees, if the exchange rate of the currency against the euro is unfavorable. You only have to consider this type of financing if you are a foreign exchange expert, in no other case.
Difference between credit and mortgage loans
Contrary to common belief, a loan is not the same as a credit, although both concepts are debts that have to be repaid.
Whether it is a personal credit or a mortgage credit, credits are debts that we contract, for a maximum amount, and that must be paid back in monthly instalments or otherwise (for example, credit policies can be paid back completely freely, as they are based on an account into which income is received and payments are made).
A loan is an obligation to repay money by means of comprehensive periodic instalments of principal and interest. The French system of constant instalments is the norm, although there are other possibilities to be agreed. Unlike credits, we are not granted a maximum amount that can then be used again, but a fixed amount that has to be returned.