Banks prepare various offers of mortgage loans for individual and corporate clients, i.e. specific banking products that are secured by entering a mortgage for the benefit of the bank in the land and mortgage register. Details of loan offers may differ significantly from each other, primarily in terms of the amount of costs related to granting the commitment. So how do you compare mortgage loan offers and choose the ones that are the best for borrowers in a given case.
What is a mortgage?
The Act of March 23, 2017 on mortgage loans and the supervision of mortgage brokers and agents defines what a mortgage contract is. According to Art. 3 clause 1 of this Act, is a contract under which the creditor grants the consumer a loan or promises him to grant a loan secured by a mortgage or other law related to residential real estate or intended to finance the acquisition or maintenance not related to business activity or running a farm:
- ownership of a residential building or a flat, constituting a separate real estate, together with their construction or reconstruction;
- cooperative ownership right to the premises;
- ownership of land or its part;
- a share in the joint ownership of a residential building or a flat constituting a separate real estate or a share in a land property.
A characteristic element of all mortgage offers without exception is their security. It is a mortgage, i.e. a limited right in rem to real estate. At the time of taking out a mortgage, the customer is obliged to enter the mortgage for the bank in the land and mortgage register in court. Thanks to this, in the event of non-payment of the mortgage by the client, the bank may pursue its receivables from the real estate.
Mortgage offers in individual banks that provide loans, inter alia, buying an apartment or building a house may have different parameters on the basis of which the proposals can be compared with each other. Among them are:
- the amount of the required own contribution,
- the amount of credit costs,
- an acceptable source of income for the client,
- compulsory and optional insurance,
- maximum age limit for borrowers,
- additional loan repayment security necessary, apart from the mortgage,
- maximum loan term available.
These are the most important issues that must be checked and put together in order to be able to select the offer that will be the most advantageous for a potential borrower.
1. Procedure for granting a mortgage
Not every person applying for a mortgage from a bank has a real chance of getting it. It all depends on the result of the bank analysts' creditworthiness verification process and the client's overall financial credibility. This capacity is defined as the ability to repay the credit obligation together with interest due to the bank and other fees related to the commitment. It mainly depends on how high the borrower's monthly income is and what the monthly costs associated with the various fees are incurred.
2. Own contribution required for a mortgage
Banks are required to require a specific down payment from customers for a mortgage. According to the Recommendation S issued for banks by the Polish Financial Supervision Authority, own contribution should amount to at least 2017% from 20. property values. However, banks are quite flexible about such guidelines, which is why some of them still allow you to take out a mortgage with an LtV at the level of 90%, i.e. with a 10% own contribution. The LtV ratio determines the maximum value of the loan granted in relation to the value of the property constituting its security. The remaining 10% it can be replaced, for example, by low own contribution insurance. The contributions for such insurance are paid by the client until the part of the capital corresponding to the missing contribution is repaid.
The amount of own contribution will be required from the customer and whether the missing savings can be replaced and in what mode depends on the individual credit policy of banks. Banks accept not only low down payment insurance, but also money kept in bank accounts, deposits, funds, or the fact that the client owns a building plot.
3. Lending costs - interest
The most important issue in comparing mortgage offers is cost. It is a mistake to compare loans only in terms of nominal interest. Yes, it is important information because it indicates the interest rate at which interest will be charged on the borrowed capital, but you should be aware that it is not the only component of the borrower's costs.
The interest rate itself usually consists of two elements:
- The interest rate at which banks borrow money on the interbank market - for loans in the Polish currency it will be the WIBOR rate.
- The bank's margin, dependent on the lending institution's decision, constituting the bank's remuneration for the loan granted.
The interest rate, or rather the bank margin itself, is negotiable, which not every customer knows. So you can finally negotiate an interest rate that will be lower than the original bid.
The interest rate may be fixed or variable. If it is permanent, it is generally only valid for the first few years after taking out the loan. Banks more often offer their borrowers a variable interest rate, so it is worth comparing in mortgage loan offers, which will determine the change of the bank's interest rate and thus a large part of the loan costs.
4. Other credit costs
When comparing mortgage offers, in addition to interest rates, you need to pay attention to other costs, such as:
- commission charged on entering into a commitment,
- preparation fee,
- the amount of insurance premiums,
- the amount of the cost of the appraisal for real estate.
Such elements of the cost of the mortgage loan may also be negotiable. In many cases, banks even give up charging commission from customers, but it can also be credited. This is a one-off fee, unlike the premiums that are paid recurringly. In order to be able to accurately assess the attractiveness of the entire mortgage offer, it must be treated holistically, as an integral whole, and not only compared with individual costs.
5. APRC of the loan - key parameter
The analysis of the costs and profitability of a loan is facilitated by the APRC ratio, i.e. the annual real interest rate, which includes all costs related to the mortgage loan. It will usually be higher than the nominal interest rate of the liability. When calculating the APRC ratio, banks take into account the amount of commission, insurance premiums, preparation fees, interest, as well as the change in the value of money over time. If we compare loans with the same principal amount and loan period, the APR will indicate which offer will be the most attractive.
6. An acceptable source of income for the client
Banks may accept various sources from which a potential borrower obtains his income. The most desirable income comes from an employment contract concluded for an indefinite period. Public trust professions such as policemen or teachers are also preferred. If the client earns income from working in his own company, and the business has only existed for a few months, he will have limited room for maneuver when taking out a mortgage. Therefore, it is worth comparing the offers of various banks in this respect.
7. Loan insurance - what are the requirements of banks?
The most common requirement is mortgage insurance in the following form:
- borrower's life insurance,
- unemployment insurance,
- insurance against serious illness and loss of ability to perform work,
- real estate insurance against fire and other random events,
- low own contribution insurance.
The more insurance a given bank requires when signing a loan agreement, the higher the potential cost of crediting, which is why the offer becomes less attractive to the customer.
8. Age ceiling for mortgage borrowers
Banks usually do not grant mortgage loans to the elderly. They set the maximum age limit to be met for the oldest borrower entered in the loan application. It may be between 67–80 years, depending on the bank. On the loan repayment date, the oldest customer may not exceed this ceiling.
9. Maximum loan term
The maximum loan period at individual banks is related to the customer's age. The Polish Financial Supervision Authority recommends banks a maximum repayment period of 25 years for mortgage loans, but they can extend it up to 35 years. If the client wants such a long period of return on the mortgage loan, he should compare the loan offers of various banks in this respect.
10. Additional loan repayment security
A mortgage is the basic security for mortgage repayment, but banks can expect other forms of security, such as a loan guarantee, a blockade of funds on the borrower's account, insurance, etc. Let's also compare loans in this respect, to choose the best offer for the client.