Understanding the terms associated with a mortgage loan in advance can help you feel more at ease during the process, more confident in asking questions, and more comfortable comparing options.
What is a mortgage loan?
Let us begin with the definition that explains what a mortgage loan is.
A mortgage is a type of loan intended for the purchase or renovation of real estate.
Through a mortgage loan, an institution lends money for the purchase of a home, land, commercial premises, or other real estate assets. The borrower agrees to make monthly mortgage payments to the lender, which include principal, interest, and other charges.
These are secured loans and are backed by collateral. In the case of a mortgage, the collateral is the property.
If a borrower falls behind on loan payments or fails to comply with other terms of the mortgage, the mortgage loan agreement gives the lender the right to repossess the property.
How to calculate a mortgage loan?
Perhaps the most important thing of all is how much the monthly mortgage payment will be.
A fundamental part of the home buying process is knowing how much you can afford to buy. One way to ensure you don't run into financial problems is to calculate your likely monthly mortgage payment using figures such as the sale price of the home, the down payment amount, and the interest rate.
It is a good idea to know this figure to ensure that your mortgage payment fits within your budget. You can calculate your monthly loan payment in advance (or at least estimate its value) so that you know what to expect and can budget accordingly.
In general, it is better to use a mortgage calculator to calculate your mortgage payment, as it is difficult to enter the formula correctly into a standard calculator.
Major banks have mortgage calculators that help take the guesswork out of the formula and can help you calculate your payments. Here is the Bank of Spain mortgage simulator.
Holder of the mortgage loan, but not of the property
Is it possible to apply for a mortgage in the name of one owner for a property while the owner is someone else?
Yes, this situation is unusual, but it is perfectly legal and has both practical and financial implications for those involved.
This may occur because the deed to the property and the mortgage deed on that property are two different documents.
The advantage of this format is that if only one person is listed on the mortgage, it does not affect the other person's creditworthiness. This limits the financial responsibility of the person who is not listed on the mortgage, giving them greater financial freedom to apply for other loans or credit, as they do not officially have this debt on their financial record.
On the other hand, this format can present greater difficulties when it comes to mortgage approval. Financial institutions tend to prefer to spread the risk among several borrowers, especially for high-value purchases such as real estate.
In cases where the property is shared but the mortgage is not, it is advisable to formalise the relationship through a Contract for the Establishment of a Joint Ownership. This document, signed before a notary, establishes the share of each owner and defines the legal basis for issues such as asset management, division of expenses and the steps to be taken in the event of sale or dissolution of the joint ownership.
Mortgage deed
A mortgage deed is an official document detailing the terms agreed between the lending institution and the customer for the establishment of the mortgage.
It is drawn up with the involvement of a notary and registered in the Land Registry so that it acquires official and probative status. The notary provides copies of the document to the bank and the client, and retains one for the settlement of the corresponding taxes.
Example of a mortgage loan agreement
What information does the mortgage deed contain?
- Loan capital. Amount that the bank lends to the customer.
- Mortgage term. Loan term, which generally ranges from 15 to 30 years. Extending the term means paying more interest over time, even though the monthly instalments are lower.
- Interest rate. It can be fixed, remaining constant throughout the life of the loan, or variable, adjusting at certain intervals according to market fluctuations.
- Amortisation System. In our country, the French system is the most common, where initially more interest is paid and progressively more capital.
- Grace periods. Phases during which only interest is paid, without repaying the capital, which ultimately increases the total cost of the loan due to the extension of time without reducing the principal.
- Commissions. Additional charges for various services provided by the bank, such as interest rate risk fees, early cancellation fees, among others.
- Late payment interest and early maturity. Conditions applicable if payments are delayed or the loan is repaid early.
- Annual Percentage Rate (APR). Reflects the annual cost of the loan, including interest and all fees.
Mortgage loan interest
When you decide to purchase a property with a mortgage, one of the factors to consider is the monthly payment and the interest rate, which will determine the total value of the loan over time.
First, it is necessary to distinguish between the Nominal Interest Rate (NIR) and the Annual Percentage Rate (APR):
- Nominal Interest Rate (NIR). This is the percentage that the bank applies to the capital it lends you, reflecting the pure cost of the loan without including additional expenses. For example, if you take out a mortgage of €100,000 at 2% APR, you are agreeing to pay 2% on the outstanding balance of the debt each year.
- Annual Percentage Rate (APR). While the APR focuses solely on interest, the AER offers a more comprehensive view of the cost of the loan by including any additional fees or expenses associated with the mortgage. The AER is particularly useful for comparing different mortgage products, as it gives you a clearer idea of the total cost of the loan.
With variable or mixed-rate mortgages, the cost of the loan may change during the term of the mortgage. These types of mortgages are usually indexed to a benchmark, such as the Euribor. The Euribor is the most widely used benchmark in Spain for calculating the interest rate on variable-rate mortgages, and it fluctuates according to market conditions.
This means that monthly payments may increase or decrease depending on changes in the reference index, adding a variable of uncertainty to your financial planning.
Impact of changes in interest rates.
A change in interest rates directly affects your monthly payments and the total cost of your mortgage. A rise in interest rates means higher monthly payments and more money paid in interest over the life of the loan. Conversely, a fall in interest rates can ease your monthly financial burden.
Here you have all the information about the expenses you can deduct from your mortgage.
Mortgage loan instalment
When it comes to understanding mortgage payment figures, we need to break down each of the components that contribute to the total amount paid each month. In addition to covering the loan itself, these payments also cover a series of additional expenses that are an integral part of home ownership.
1. Capital and Interest. Mortgage payments are mainly divided into two parts: principal and interest. Principal is the amount of money you initially borrowed from the bank. This is the core of the loan you are repaying. Interest, on the other hand, represents the cost of the loan, calculated as a percentage of the outstanding principal. This is essentially the price you pay for using the lender's money.
2. Escrow Account. In addition to principal and interest payments, it is common for the bank to establish an escrow account to cover property taxes and home insurance. This account functions as a security deposit, where a portion of each mortgage payment is set aside and then used to pay these obligations directly when they become due.
- Property Taxes: These taxes are collected by local authorities and are calculated based on the value of your property. They are usually paid annually, but if you have an escrow account, you will pay one-twelfth of this amount each month, and your lender will take care of the total payment on the due date.
- Home insurance. Similar to property taxes, a portion of your mortgage payment also goes towards home insurance, which protects your home against damage from fire, storms, and other risks. As with taxes, the lender accumulates these amounts monthly and makes the corresponding annual payments.
3. Mortgage Insurance. If the initial payment is less than 20% of the purchase price of the property, you will probably also be paying mortgage insurance. This insurance protects the lender in the event that you are unable to meet your mortgage payments. The premiums for this insurance are added to your monthly payment and, like home insurance and property taxes, can be managed through the escrow account.
Mortgage loan number
The mortgage loan number is a unique identifier assigned to each mortgage loan by the lending bank. This number functions similarly to a bank account number, but is specifically designed to identify and manage the details of a mortgage loan.
Structure of the Mortgage Loan Number.
Although the structure of this number may vary between different banks depending on their internal policies, it generally follows a standard format:
- The first four digits identify the bank.
- The following four digits correspond to the code of the office where the mortgage was taken out.
- Two additional digits serve as a control code, ensuring that the number is unique and correctly assigned.
- The last ten digits represent the specific number of the mortgage loan.
Usefulness of the Mortgage Loan Number
This code makes it easier for financial institutions to maintain detailed and organised records for each mortgage, while also providing borrowers with a tool in several respects:
1. Payment Verification. It enables borrowers to ensure that payments made are correctly allocated to their specific mortgage.
2. Complaints and Enquiries. In the event of any discrepancy or need for information about the loan, this number is essential to facilitate the claims or enquiries process.
3. Interactions with the State. Organisations such as the Tax Agency may require this number to verify tax deductions related to the property or to check expenses associated with the home.
Where to find your mortgage loan number
Where can you find your mortgage loan number?
If you need to find your mortgage loan number, there are three ways to do so:
- With your bank. The most direct way to obtain it is by contacting the bank that granted you the loan. You can do this in person at the branch, through online banking, or by calling customer service.
With your bank. The most direct way to obtain it is by contacting the bank that granted you the loan. You can do this in person at the branch, through online banking, or by calling customer service. - Mortgage payment receipts. This number also appears on each of your mortgage payment receipts.
- Summary of tax data. Each year, your bank sends you a summary of tax information that includes details about your mortgage loan. This document shows your loan number and is also a useful tool for filing your tax return.
Mortgage loan cancellation
Finishing paying off a mortgage is a huge financial relief.
However, the process of completely severing the legal obligation and officially registering that the debt has been settled involves several important steps.
Here we explain how to cancel a mortgage registration, ensuring that each step is carried out correctly and efficiently.
- Step 1: Obtaining the zero debt certificate. The first thing you should do is contact your financial institution and request a ‘zero debt certificate’. This official document certifies that you have paid off your mortgage in full. The good news is that the bank must provide this certificate free of charge.
- Step 2: Notarial and registration procedures. Once you have obtained the certificate, you must decide whether you want to handle the notarial and registration procedures yourself or whether you prefer the bank to take care of them. If you choose the latter option, the bank may charge you for this service, including commissions and related expenses, which they must clearly inform you of before proceeding.
- Step 3: Visit to the notary. The next step is to take the zero debt certificate to a notary. You have the right to choose the notary you prefer. During this visit, which the financial institution should not charge you for, the cancellation of the mortgage will be formalised. There are no costs associated with signing or travelling to the notary for this specific procedure.
- Step 4: Stamp Duty (IAJD). Subsequently, it is necessary to request and complete the form for Stamp Duty, although in the case of mortgage cancellation, this procedure is exempt from payment. This document must be processed at a branch of the corresponding autonomous community.
- Step 5: Land Registry. Finally, with all the documents in hand — the zero debt certificate, the copy of the IAJD, and the deed — you must go to the Land Registry to officially register the cancellation of the mortgage. The costs of this last step vary and are based on the value of the mortgage originally registered.
Mortgage loan expenses
Purchasing a home through mortgage financing involves a series of costs that go beyond the purchase price of the property.
Here we break down who bears which costs in the mortgage application process according to Spanish mortgage law.
Expenses to be borne by the future owner:
- Valuation. Before granting a mortgage loan, the bank requires a property valuation to determine its market value. This valuation must be carried out by an entity accredited by the Bank of Spain, such as Gesvalt, and costs between €200 and €600. The valuation is valid for six months from the date of issue. Here you will find all the information about the documentation required to value a property.
- Notary's office. Although the bank is responsible for drawing up the mortgage deeds, the buyer must pay for any copies of the deed they request, at an approximate cost of between €0.60 and €1 per page.
- Opening commission. This is a fee that some banks charge when formalising a mortgage. It is not limited by law and can range from 0.11% to 21% of the capital borrowed.
Expenses covered by the bank:
- Stamp Duty (AJD). This tax is applied to the mortgage deed and must be paid by the bank. The cost varies depending on the autonomous community and ranges from 0.51% to 1.51% of the mortgage value.
- Notary: Notary fees for registering the mortgage loan are the responsibility of the bank. These expenses are usually approximately 0.31% to 0.51% of the loan amount.
- Administrative agency: The services of an agency, which are necessary to register the deed in the Land Registry and manage the payment of taxes, are also paid for by the bank. Agency fees are around €400.
- Registration: The costs of registering the mortgage in the Land Registry are borne by the bank. Fees are regulated and are usually between 0.11% and 0.31% of the mortgage value.
It is always advisable to consult with financial and legal advisers to ensure that you understand all the details before signing any mortgage documents.