A mortgage loan is a medium or long-term loan granted by a banking institution for the acquisition of a dwelling or real estate property. As security for the payment of the sums drawn down and the interest accrued, the financial institution holds the power to sell the acquired property or dwelling in the event that the debt incurred by the user cannot be satisfied.
How does a mortgage loan work?
To understand its operation, we must differentiate between mortgage credit and mortgage loan.
Regarding the mortgage loan, the banking institution grants a sum of money of which the client may dispose in full or in part, being permitted to utilise the remaining balance, provided that the credit limit is not exceeded.
The loan, for its part, is a closed agreement with specific conditions subject to highly specific frameworks of variation.
Types of mortgage loans available
There are numerous types of mortgage loans depending on the offering of each banking institution. These are the most common:
- Fixed-rate mortgage loan: the interest on the mortgage loan remains fixed throughout its entire duration.
- Variable-rate mortgage loan: the interest on the mortgage loan fluctuates based on a reference index.
- Mixed mortgage loan: the loan combines a period during which the interest is fixed with another at a variable rate.
- Mortgage loan with a grace period: establishes a timeframe during which only the interest is repaid.
- Subrogated mortgage loan: is that obtained when changing financial institutions while maintaining the mortgage loan.
- 100% mortgage loan: covers the total value of the property intended for purchase.
Advantages and disadvantages of mortgage loan
A mortgage loan offers numerous advantages; however, one must not overlook its disadvantages:
Advantages of mortgage loan
- It facilitates the acquisition of a dwelling.
- It allows for application to various types of real estate.
- It is offered over manageable terms.
- Interest rates are typically significantly lower than those applied to loans for the acquisition of other assets (personal loans), although this shall depend on the lending institution and the contractual conditions.
Disadvantages of mortgage loan
- It entails a long-term financial commitment.
- It may involve the contracting of other services from the institution in order to reduce the installments.
- Certain mortgage loans carry penalties for early repayment.
- Very long-term mortgage loans can pose an economic risk, despite how low the monthly payments are.
Process for obtaining a mortgage loan
Prior to addressing the application for a mortgage loan to your banking institution, it is highly advisable to evaluate certain aspects to determine its suitability. Therefore, you must review your income as well as your savings capacity, remaining mindful that you must meet the monthly repayment of the loan granted by the bank.
Likewise, banks will take into account your debt history or credit history when determining whether or not to grant the credit for your mortgage. Other factors, such as the age or salary of the applicant or their employment status, constitute further criteria that the banking institution will consider before granting a mortgage loan to assist in the purchase of a house or property.
The appraised value of the property is the reference for establishing the loan amount.
Frequently asked questions about mortgage loan
What happens if I cannot pay my mortgage loan?
Failure to repay the mortgage loan incurs default interest, in addition to constituting a risk to the client’s credit history.
If non-payment persists, it is possible that the lending institution may rescind the contract due to breach of terms and apply the corresponding sanctions, which at times involves the loss of the mortgaged property.
Is it possible to renegotiate the conditions of a mortgage loan?
Under certain circumstances, it is possible to renegotiate the conditions of the mortgage loan with the aim of reducing the amount of the installments and/or commissions, albeit potentially at a longer repayment term.
Consequently, it is important to take note of the cancellation commission for subrogation (if the client decides to change financial institutions).
What happens if I cancel my mortgage loan early?
Certain credit institutions impose a penalty for the early cancellation of the service. Commissions may be applied for partial or total cancellations, and in the latter case, where it arises from the client having negotiated with another financial institution.
The client should endeavour to ensure that the financial institution does not apply commissions in the event of partial or total cancellations for reasons other than subrogation (for instance, if the client has received an inheritance or won the lottery). It is more difficult to negotiate the removal of the commission for total cancellation by way of subrogating the credit to another financial institution.