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Do you know how to get the best mortgage?

There is no doubt that after some disastrous years in which the economic crisis devastated the real estate sector as well as the pockets of the majority of Spaniards, everything seems to indicate that right now the market is experiencing a pronounced recovery marked by the increase in purchasing power of buyers and the low interest rates of mortgages offered by banks.

However, even though all the data sounds optimistic, when applying for a mortgage to purchase a home, you have to take a series of factors into account. In this article, we will explain the types of mortgages available in order to determine which is best for you. We will also give you some tips that will come in handy when choosing a bank or lending company.

Types of mortgages

Before purchasing a home and applying for a mortgage, many people believe that there are only two types of mortgages; the fixed interest rate or a variable interest rate. However, there are many other criteria that intervene in these financial products. Here we will explain them to you.

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Types of mortgages based on interest rates

The interest rate is defined mainly as the proportion of the borrowed sum that the debtor must pay back to the creditor as compensation for the capital he has received. This means the borrower has to repay the money with interest and within a certain period of time as agreed with the lender. Generally, the interest rate is calculated by a percentage.

Following this calculation, we can distinguish between three types of different mortgages:

1. Fixed interest rate. This is when the interest rate remains unchanged throughout the term of the loan's repayment. This, on the one hand, offers security to the debtor as he knows exactly how much he will repay from the first installment until the last. Nowadays, it is easy to find banks that offer this type of mortgage for less than 2%.
2. Variable interest. The interest rate varies during the loan repayment period. Keep in mind that this varies depending on the Euribor plus a differential. At the moment, this indicator is on the downside and in negative, so the variable interest type of mortgage is the most profitable. However, we must not forget that up until a decade ago, it reached 5 points.
3. Mixed interest rate. As you can imagine, these mortgages combine characteristics of the two previous types. Because, in general, the fixed rate is applicable during the first few years and the rest do not enjoy a great demand at this time, although this has not always been the case.

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Types of mortgages based on properties

The characteristics of the property and its intended use by the owner will also influence the type of mortgage given. It is necessary to differentiate between:

1. Mortgages for first time buyers. It is usual for banks to offer much more favourable conditions to applicants in case they want to buy their first home. This is the reason why, in general, the lenders offer up to 80% on the valuation price and a longer repayment term than normal. In fact, the term can exceed 30 years.

2. Mortgages for second homes. If the house to buy is not going to be used as a habitual residence, the bank usually imposes less favourable conditions for the buyer. In fact, they usually do not cover more than 60% of the valuation price and the repayment period is usually 25 years at the most. It must also be said that the lender will carefully assess the borrower's financial situation and even request for more than one guarantor.

Mortgages for special circumstances

The banks provide the granting of special mortgage loans in certain circumstances. The most important are the following:

1. Mortgage loans for officials. Being a civil worker, an autonomous community or a town hall is synonymous with solvency for banks, which is why it is usual for them to offer better and exclusive conditions for contracting the loan.

2. Mortgages for the self-employed. Quite the opposite as in the previous case. Self-employed workers tend to suffer from higher interest rates and shorter repayment terms than those who work for companies.

3. Mortgages for young people. Those who wish to purchase a home and are between 18 and 24 years of age also enjoy more favourable conditions.

4. Inverse mortgage loans. A product that has been known for a long time but has not been marketed in Spain. It is specifically intended for people with disabilities with up to equal 33% LTV and pensioners over 65 years of age. In these cases, the bank is the one that pays an agreed amount to the borrower in exchange for the house becoming theirs upon his death.

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Tips for choosing the right bank

Do not think that your life-long bank or the one where you have your wages paid into is the only one in a position to manage your mortgage. Since the market is open to all, you will have the opportunity to choose the one that suits you best. To make the right decision, here we are going to give you a series of tips that will undoubtedly be very useful for you:

1. Check the bank's financial situation. Let us not forget that in the past few years several banks have gone bankrupt or have been very close to insolvency. Therefore, it is important to choose one that is in a good position and all the possible guarantees. At the end of the day, in addition to offering you a mortgage, it is likely that these banks will also hold part or all of your savings. 
2. Pay lots of attention to the commissions. Not all banks apply the same fees. Although some claim that they do not charge any fees in the fine print, it is possible to find some charges. Try to choose the mortgage that offers fewer charges for opening, repayment, cancellation, etc.
3. Interest rates that apply. This is only applicable in fixed rate mortgages. Make sure you write down the figures and, if you need to, consult with a financial adviser. Sometimes, by the mere fact of saving as little as a percentage, it is possible to find unpleasant surprises in the form of commissions or similar rates.
4. Additional guarantees. Typically, along with your mortgage, you may obtain other services from the lender, such as a current account or a credit card. Make sure that the bank offers you the best possible guarantees regarding these without any extra charges, such as annual fees for account maintenance. 
5. The closer you are to the bank, better. Having an office close to the bank that has granted you a mortgage is always an advantage. Despite the fact that online banking works more effectively and is more widespread, it is still best to solve serious problems in person and necessary to resort to a one-to-one interview. In addition, if the account also allows you to withdraw money through the ATM, this will ensure that you will always have your money at your fingertips.
6. Get something in return. For a bank, a client with a mortgage who has good credit history is a real blessing because, in terms of interest, the bank will make profits from that client. Therefore, try to get something in return, either in the form of a gift or bonuses in other products. For example, aside from those companies that usually offer televisions, game consoles or tablets for hire, there are others that give discount cards for petrol stations, supermarkets and other commonly used establishments that allow you to make a good saving.

A mortgage is not a contract for life

Before concluding this article, we want to remind you that a mortgage is not a lifetime contract that binds you with the lender. With this we mean that at a later date it is possible to go to another bank if it offers you better mortgage conditions. If so, you can change your bank whenever you want. A little research on all the latest offers will help you find the best deal. 

This can be especially useful in case you want to apply for a capital increase. It can also be a very good option if, at the time of your application, interest rates were very high and then they went down. It is true that in the short term the benefits may not be very palpable but, if you still have several years to repay the loan, you will end up realising that the process was worth it.

In summary, if you are going to apply for a mortgage soon in order to buy a home, do not forget to take into account all the advice we have just given you. We assure you that you will most likely end up choosing the best option available to you.
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Engel & Völkers
Licence Partner Madrid

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