The cost of a mortgage
When you take out a mortgage, you of course repay the amount borrowed: the capital. But to that you need to add the loan interests, the insurances, the guarantees and the fees. The interest rate is the percentage that measures, over time, the cost to the borrower and the lender's profitability. More clearly, the bank gets more than it lends.
There are two types : fixed rate and adjustable rate:
• Fixed rate loans: Upon signing the contract, you know the credit rate, the monthly payments and the date of maturity of the loan. It's simple and easy to manage. But these fixed loans are rigid. If in the coming months, rates were to fall, your payments would remain unchanged. Conversely, if interest rates began to rise, you'd be protected.
• Adjustable rate loans: They are indexed on financial indices (Euribor for example) allowing your monthly payments to vary upward or downward. These changes lead to some uncertainty on your costs. In return however, the rates are lower than those for fixed rates.
To protect borrowers, the adjustable loans have securities. Thus, if interest rates soar, either the duration of the loan is extended (this extension cannot generally exceed more than five years the initial term of the loan), or the amount of your monthly payments is increased according the increase in the rate. Conversely, if rates fall, the credit period is shortened.
Some insurance are almost mandatory if you want to get your mortgage. There are two insurances:
• Death and disability insurance: Without it, you cannot borrow. The average rate is 0.40% of the capital borrowed. This cost will be added to the monthly payment.
• Jobloss insurance: It is very safe with your monthly payments being paid on your behalf in case of unemployment but they are expensive (from 0.10% to 0.70% of borrowed capital). They are reserved for employees with permanent contracts (CDI).
A bank would not lend you money without taking some safeguards to protect themselves in case of default.
The mortgage guarantee, a deposit guarantee, the PPD guarantee and the collateral guarantee:
The mortgage guarantee allows the bank to take ownership of the property in case of a default by the borrower and to sell it to repay the amount borrowed. On average, this guarantee will cost you about 2% of the amount borrowed.
In order to obtain a deposit guarantee a deposit is to be paid by the beneficiary of the mortgage to a special institution (mutual fund), which becomes the guarantor. It is this special institution who, in the event of default, pays the bank, before turning towards the borrower. On average, this guarantee will cost about 2-3% of the amount borrowed.
The maindifference between the mortgage guarantee and the deposit guarantee is financial! The mortgage involves many costs: land registration tax, stamp duties, notary fee of ... This is why more and more buyers are turning to the bond. Because if its original cost is substantially the same as a mortgage, a portion of the assessment paid is returned when the loan is fully repaid. And the borrower save the cost costs of recording of the notarial deed.
The PPD operates onthe same principle as the mortgage guarantee.It allows therefore to the lender to seize the propert yand sell it through the courts if the borrower fails to repay the monthly installments. However,the PPD can apply only to existing properties(old or new property whose construction is fully completed) or land. The PPD is the subject of a notarial deed and should be included in the mortgage within two months of the sale.The interest for the borrower is that it is exempt from advertisement feesand is less expensive than a mortgage guarantee.
The collateral guarantee: a contract by which a debtor gives something to his creditor as security for the debt. This may bean alternative to the mortgage or mutual guarantee.This may include jewelry, life insurance contracts, safe investmentsor even cash.The bank has the option to sell these properties to repay if the borrowerdoes not pay its debts. This guarantee does not cost anything,but is often reserved fo rbank customerswith a valuable portfolio sufficient to guarantee their credit. The fee, when one takes out a mortgage, averages about 1% of the capital borrowed.
Finally, to choose the best mortgage for you, you need to look at the percentage rate (APR). It is an essential element of a loan offer. The APR must include in its calculation all fees charged by your bank to accept funding you, that is to say, the fees, related expenses and insurance. It can be used to compare different offers and should be neither wrong nor exceed the usury rate,at the risk of having sanctions.