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Home loans: Interest rates associated with a home loan

29 JUNE 2022
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Dicas Mercado Imobiliário Euribor Taxas de Juro Destaque Notícia Homepage Compra de Imóveis Comprar Casa em Portugal Spread TAEG Crédito Habitação
When you take out a mortgage to buy a house, besides having to pay the capital to the bank, you are charged additional costs, translated into interest rates. Learn all the fees you are subject to when paying your installments.
Home loans: Interest rates associated with a home loan
Interest rates on mortgages:
  • MTIC: Total Amount Imputed to the Consumer.
  • APRC: Annual Percentage Rate.
  • TAN: Nominal Annual Rate.
  • EURIBOR: European Interbank Offered Rate.
  • Spread: Component of the interest rate that adds to the EURIBOR, freely defined by the credit institution.
  • Variable interest rate: The sum of the EURIBOR and the spread and varies during the credit period according to changes in the EURIBOR.
  • Fixed interest rate: This is freely defined by the credit institution and remains unchanged until the end of the contract.
  • Mixed interest rate: In loans taken out at a blended rate, there are periods when the rate is fixed and others when it is variable.

Spread
The spread is a component of the interest rate freely established by the lender for each loan it grants. Generally speaking, this rate is covered in the interest that the bank charges the client and portrays the profit that the client will receive for the loan granted.

By lending the amount requested, the bank assumes a risk, and the higher this risk, the higher the spread may be.

The risk differs from customer to customer, and some of the aspects that establish this risk are the credit history, the relationship between the amount to be financed and the value of the guarantees given to the bank, monthly net income, professional situation, type of employment contract, other savings or assets that the applicant may have, among other factors that may depend on each banking entity.

The value of the spread may also differ depending on whether the customer hires other products or services from the bank, such as, for example, buying a credit card, setting up a Retirement Savings Plan (PPR) or taking out insurance.

Since the spread influences the cost of the loan, it is essential to compare all the offers on the market in order to take advantage of the most competitive one.

Euribor
Euribor (European Interbank Offered Rate) is a reference rate for the Interbank Monetary Market (IMM), resulting from the average of quotes provided by a number of European banks.

As a rule, interest rates on mortgages are indexed to Euribor. In this sense, the higher the value of the indexer, the higher the instalment, since the interest to be paid will be higher.

Euribor is variable throughout the credit agreement, according to the chosen term, from one week to 12 months. In Portugal, the most commonly used indexes are the 6 or 12 month Euribor.

Nominal Annual Rate (TAN)
The Nominal Annual Rate (TAN) is the rate used for all types of operations, whether they are credits or financial applications, which include interest payments.

In the case of interest rates on mortgages, and particularly on variable rate mortgages, the APR is the sum of the spread and the EURIBOR.

Annual Percentage Rate (APR)
The Annual Percentage Rate (APR) is one of the most significant when it comes to interest rates on mortgages. It portrays the cost of the credit, since it includes all the charges relating to the loan, these being:
  • Interest, commissions and taxes;
  • Insurance required for the contracting of the loan;
  • Costs related to the maintenance of the account that needs to be opened for the housing loan;
  • The fees charged for registering the mortgage;
  • Costs that may exist associated with payment transactions;
  • Any spread subsidies.

The APR differs depending on the amount of financing and lenders are required to disclose this rate according to the legislation in force.

If a promotional rate is offered when the credit is contracted, the bank is responsible for disclosing it to the consumer and informing him/her of the APR with and without the respective discount.

In addition, when comparing the offers of different entities, one should also consider other benefits inherent in the products that allow the interest rate subsidy, such as an interest-bearing account or a credit card with a good cashback percentage.

Interest Rate Modalities
There are three interest rate modes on the mortgage loan that you can choose to pay off the loan: variable, fixed or mixed interest rate.

#1. Fixed interest rate
By using a fixed interest rate, you will be paying the same installment for the entire duration of the credit agreement. Thus, you are not exposed to the risk of interest rate variation.

This interest rate is determined by the bank, in each contract, considering the credit risk of the client, the ratio between the value of the loan and the value of the property (loan-to-value), its financing cost and the period for which it is fixed.

#2. Variable interest rate
In case you choose the variable interest rate, the installment will fluctuate during the credit period. This interest rate is the result of the sum of two factors: the Euribor (indexing factor) and the spread.

Euribor is variable throughout the term of the contract and according to the chosen term. In other words, if the consumer chooses 12-month Euribor, at the end of this period, his monthly installment is revised and may reduce or increase depending on the rates in effect at that time.

#3. Mixed interest rate
Finally, there is also the mixed interest rate option. With this modality the client can choose to contract the mortgage with a fixed rate in the first 10 years, for example, changing to a variable indexed rate in the remaining period.

Finally, it is fundamental that you take the MTIC (Total Amount Imputed to the Consumer) into final consideration when you select the lender for the mortgage credit. This is what establishes how much you will pay, in the end, for the totality of the loan requested.

The information about this amount and all the other information is provided in the ESIS (European Standardised Information Sheet) that the bank or financial institution is obliged to provide when granting the loan, before the customer accepts the offer.
Topics
Dicas Mercado Imobiliário Euribor Taxas de Juro Destaque Notícia Homepage Compra de Imóveis Comprar Casa em Portugal Spread TAEG Crédito Habitação
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