A mortgage loan is technically the same as any other type of credit provided by a bank, but with one important difference: the collateral offered for the loan is the home itself. This means that if you fail to make the required payments, the bank can terminate the mortgage and repossess the property.
It is therefore extremely important to pay close attention to the terms and conditions of the mortgage contract, which in summary are likely to include:
- The loan principal: this is the amount of money being loaned by the bank.
- Repayment schedule: this details the time period agreed upon for repaying the amount of the loan. It should include the number of installments to be paid, their amount, and in the case of variable-rate interest, the initial interest rate to be applied.
- Interest: the interest rate to be applied should be specified here, as well as the procedures used to periodically revise the rate in the case of variable-rate loans. The contract should also include the annual equivalent interest rate (AER), which is calculated according to a formula approved by Banco de España. The contract should also indicate the penalty interest that will be applied if your payment of any of the installments becomes past due.
- Commissions, fees, and costs: the bank should specify all of the commissions and fees that will be charged when the loan is first established, including those for early repayment if this occurs, for full discharge of the loan, and for any actions related to formalization and administration of the mortgage.
When you apply for a mortgage and then carry out the process to establish it, you will have to pay some expenses such as the ones listed here:
Before applying for the mortgage:
- Appraisal of the property: this expense is derived from the need to determine the actual current value of the home. The bank typically takes care of this process for its customers.
- Performing a title search: this involves locating the home in the Property Register and checking on whether any liens are being held on the property.
When applying for the mortgage:
- Loan origination fee : this is the cost related to establishing the mortgage loan. It tends to vary between 0.5% and 2% of the amount being applied for.
- Administration and processing fees: these are costs incurred during processing of the loan documents with the tax authorities (in Spain known as the Hacienda), for payment of the taxes involved and entry into the Property Register.
- Notary expenses: these include the costs of the notary services for authorizing the loan documents and the costs of any associated materials and copies. The fees charged for notarization are regulated by law.
- Property Register fees: this cost must be assumed as a result of entry of the mortgage into the Property Register.
- Tax on Documented Legal Acts: this is a tax derived from formalization of the deed. It varies, depending upon the region of Spain, between 0.7% and 1.5% of the total amount guaranteed, or in other words, the loan principal plus all interest and expenses.
- Homeowner's insurance: a mandatory policy that covers possible damage to the property.
Taxes generated by the sale:
- Value Added Tax: (10%) if the home is new.
- Tax on Property Transfers: (8% up to €300,000) if the home has been previously owned.
You can use this tool to calculate all of the information you need before applying for a mortgage.
Do not forget:
If you take over an existing mortgage, you will obtain the following advantages:
- You will only have to pay a subrogation commission.
- You will not have to pay loan origination fees, study fees, or appraisal expenses.
- If you agree to take over a mortgage from the developer, you will not have to pay Tax on Documented Legal Acts.