Which type of mortgage to choose
When we are about to buy a home, in most cases, we will need a mortgage loan but… What type of mortgage should I choose?
Let’s see a classification of the different options available to us to find out which type of mortgage to choose. At Asmcasas, your estate agent in Valencia, we want to provide you with all the information you need to make the right choice for your mortgage.
By interest rate
We offer loans based on the interest rate, i.e. the percentage we will pay for the money borrowed and its characteristics. We talk about fixed, variable or mixed interest.
If we want to choose to pay the same amount for the whole life of the mortgage loan, the fixed interest loan guarantees exactly that.
In this type of loan, although they are usually more expensive, they avoid unexpected increases in the instalment due to the rise in reference rates such as the Euribor or the IRPH, which we will see later on.
One of the disadvantages of fixed interest mortgages is the high percentage of subrogations, around 4% depending on the entity, so it is advisable to study the conditions proposed by the bank.
The majority of mortgages taken out in our country are under this type of interest.
A type of credit in which half-yearly or annual revision is made and the quota is increased or decreased according to the reference index (EURIBOR), is what we call interest rate revision.
The banking offer on this product varies not only depending on the entity, but also on the moment of contracting.
Some years ago, when the indicator by reference (EURIBOR) ranged from 3 to 5%, we could find variable interest mortgages to which the entity increased from 0.25% to 1%.
Currently, with the EURIBOR at a negative level, the banking offer that we can find does not go below 1.5% even with protection clauses for the bank with respect to negative Euribor levels.
This mode is a combination of the two previous types. One percentage of the interest varies according to the reference index and the other, agreed with the institution, is left with a fixed interest rate.
Mortgage credit by type of quota
Although fully related to the previous section, we can also opt for a mortgage loan according to the type of instalment, or rather, how this interest is applied to the monthly instalment.
Applicable to variable and mixed interest rate mortgages, it is the most common modality and with the greatest number of contracts.
Based on the French amortization system, a recalculation of the interest is made annually or half-yearly, paying the same amount during the period.
Each of the monthly payments is divided into two parts: Amortization of the capital (we reduce the debt contracted with the bank) and interest.
Normally in the first years, a high amount of interest is paid and a low repayment instalment, something that changes over the years until the interest part is usually symbolic and a higher repayment of the loan occurs.
With this type of mortgage, although we have a variable interest rate on our mortgage, with this type of repayment, the amount to be paid will be the same for the whole life of the loan.
The difference lies in the fact that the repayment years vary, increasing if the interest rate rises and decreasing if it falls.
The calculation of the final instalment, consists of deferring a percentage of the debt to be paid in the last instalment, normally between 25 and 35%.
With this method, the interest on the total debt is calculated and it is also expected that the last instalment will be paid, which is usually high.
Interest only mode
This is a little used system where only the interest on the loan is paid. Once the deadline has passed, the full capital must be paid or ‘proceed to the sale of the property.
We could understand this option as a rent with a high final payment.
Increasing instalment system
A system that is not recommended, which although at the beginning we would pay less for our mortgage than with the calculation of the French system, in each revision the interest would increase between 1% and 2%, which will make the product considerably more expensive over the years.
These are the interest rates and methods for clarifying which type of mortgage to choose. In the following article, we will see the products that the banks market for a specific type of public and according to the type of asset that we want to mortgage.
You can contact us and access to our offer of flats in Valencia, we will solve all your doubts about mortgage credits.