A mortgage is one of the most important financial decisions that almost all of us make in our lives. The rush in this case is a bad adviser, because the mortgage consists of various costs that must be carefully analyzed beforehand. If we decide on a mortgage, it is worth knowing that it is usually a decision for several years. A decision that can not be changed anymore, so it is worth being carefully thought out step by step from the very beginning.
What do you need to know about a mortgage?
When we buy an apartment, we very often look mainly at the amount of the installment that we will pay back each month. However, a mortgage as a liability is a much more complicated product. Already at the stage of choosing among various banking offers, you should pay attention to all the factors that ultimately determine the cost of the loan – including those spread over time.
Fixed and decreasing installments in the case of a mortgage
A customer deciding on a mortgage must decide whether he wants to pay fixed or decreasing installments. Each loan installment consists of two parts: interest and capital. Although it seemingly concerns the amount of the monthly installment repaid, the difference lies in the ratio of the repaid principal to interest. In the case of decreasing installments, we start with high installments, but we repay the capital faster. This is a favorable option from the perspective of time, because interest is charged each time on the outstanding loan amount. This form is definitely beneficial for people who already have some own contribution. The faster the capital decreases, the lower the interest will be. In the case of an equal installment, we always pay the same installment, but the ratio of interest to principal is different.In the first years of loan repayment, the share of capital in the installment is usually lower than the amount of interest accrued. From a purely financial point of view, decreasing installments seem to be more advantageous, because ultimately the cost of the loan is lower and we repay the debt faster. However, the price for this comfort is a higher installment in the initial financing period. Married people, or simply more affluent people, can afford it. The impact of creditworthiness on the amount and decisions on granting a mortgage. Not every person will be able to take advantage of decreasing installments. In the first years, the amount of the equal monthly installment is much lower than the decreasing installment, so this significantly translates into the applicant’s creditworthiness. If the installments are very high in the first years, the creditworthiness must be much higher. The example above already showsthat the mortgage determines your creditworthiness. The borrower’s ability is tested by a bank analyst on the basis of various data such as credit history at BIK, or data that he will provide the bank himself, such as earnings certificates or security for the loan. People who have the best creditworthiness and a history of various bank realizations win.
The second element that makes up the loan interest rate is the bank’s margin. This is a fixed parameter. It is specified in the loan agreement. It can only be changed by an annex to the contract, when both parties agree to the change. The margin itself depends on the bank’s policy, and this is where the greatest scope for negotiation is. It is especially worth paying attention to at times of low interest rates, when it seems that loans are cheap. It is always worth negotiating the margin, because during higher interest rates, our installments will increase and the margin will remain unchanged! That is why it is so important to read the contract that binds us with the bank for years. The bank often charges a one-off fee set as a percentage of the loan value. It is worth negotiating here for the best possible conditions for us.Some banks are tempted with promotions – the vision of a very low commission or no commission at all. It is worth remembering that nothing is for free – the bank may look for profits in a completely different place, if they are willing to give up the commission, so in this case, pay special attention to other fees that may be related to granting a loan, e.g. insurance, the requirement to open an account in a bank, or buying another product.
A few years ago, there was no problem with a loan for 100% of the property value, and sometimes even exceeding the client’s needs. Banks willingly contributed 10% or even 20% for additional renovation or furnishing of the apartment. This, of course, increased the final amount to be repaid and meant that the bank earned even more, only during the entire loan period. It was certainly very beneficial for young people who are just starting their adult lives. Today, own contribution is already obligatory and most banks have a provision in their regulations that they must have 10% or even 20% of their own contribution. Although many customers consider this a limitation, the higher your own contribution, the more you will actually save on the loan.Often, a very good solution is even to postpone the loan in order to increase the amount of own contribution – a year of saving may ultimately translate into even tens of thousands of zlotys in interest savings during the entire loan period. The larger own contribution is the less capital you borrow, so interest is also charged on the smaller amount.
Time to pay off the loan
The longer the repayment period, the less the repayment installment will feel, but the greater the final amount you have to pay back. The cost of the loan is always calculated on an annual basis, i.e. the longer the loan, the longer the interest payment period. If we focus on making the monthly installment as low as possible, you will strive for the longest loan period. However, if we start looking at the numbers, each year of crediting less is a significant saving – everything of course depends on individual arrangements with the bank, – therefore, accurate loan simulations are made before signing the contract.