Mortgage loan – what it is and what it serves

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A mortgage loan, in other words, a mortgage, is one of the common financial products of both the banking and non-banking sectors, primarily used for the purchase /construction/reconstruction of real estate.

Mortgage loans are most often used to finance the purchase of an apartment, house or its construction (whether you pay the full purchase price or, for example, the price difference when exchanging real estate) or for other construction modifications to the property. The debtor guarantees the creditor with collateral of the purchased or other real estate.

In addition, it can also be used to settle ownership relationships, such as spouses in divorce, in the case of a client’s membership in a housing cooperative that offers a mortgage as a means of payment of membership interest. However, it should be borne in mind that each bank determines the purpose of the mortgage (some banks lend, for example, only for the purchase of a house and not for a cooperative apartment or building a house).

How can I apply for a mortgage and what do I need?

How can I apply for a mortgage and what do I need?

A. Simply apply for the mortgage via the Internet; set your mortgage and repayment period on your bank’s website and have your monthly payments and interest calculated on a non-binding basis.

Despite the simplicity of this step, however, we recommend familiarizing yourself with the offer of more banks, to compare not the interest rate, but the APR. Also read the business terms and conditions of individual banks, learn about any administrative and sanction fees.

Once you have made your choice, go to the bank personally and agree on the terms and conditions. You may also receive a better deal than that shown in your ad or online.

B. As with the vast majority of loans, a mortgage application must meet certain criteria and be accompanied by the necessary documentation. You may encounter requirements such as (the necessary documents may vary depending on the bank’s requirements and the purpose of your mortgage):

  • A copy of the identity document of all applicants.
  • If the applicant is a foreigner, he must present a residence permit.
  • If only one of the spouses applies, a contract is required to narrow the joint property of the spouses.
  • Purchase / gift contract for financed or pledged property, proof of payment of the purchase price of the property.
  • Estimation of property price. This can be processed for example by an expert witness, an expert-trader, or directly by a bank appraiser, who estimates the price of the property for the purpose of the mortgage. Allow for a several thousand estimate fee.
  • Proof of income, eg account statements, employment contract, employer confirmation, etc. In the case of self-employed persons, they must prove their results for the last year up to two, through a tax return.
  • In the case of purchase of land is necessary proof that it is intended for development.
  • Building permit.
  • Judgment of the court on divorce of marriage and settlement of joint ownership.
  • It is possible that the bank may require you to have a certain amount already saved by you, or to have other real estate pledged.
  • Also, the mortgaged property is a common requirement, whether it is the same property the borrower buys or another. The bank thus protects against losses / loss-making clients.

C. Upon receipt of the relevant documentation, your application will be subject to an approval process, during which you may be required to provide additional supporting documents (prior to drawing the mortgage).

D. After approval, the bank shall sign a contract. Read it carefully, ask any questions, and only after you understand everything, sign it. If you go to a mortgage with your spouse, he / she must sign the Mortgage Accession.

E. After drawing up the mortgage, it is necessary to submit again several other documents, such as the Notice of lien by the relevant bank (if you refinance) or proof that you are the owner of the property.

Who provides mortgages?

Who provides mortgages?

Mortgages are provided by both banks and non-banking companies . Therefore, if you have trouble obtaining a mortgage loan from a bank, you can contact the non-banking sector. The unwritten rule, however, is that the easier and faster the acquisition of a loan, the more you overpay and the “cruel” the conditions, interest, sanctions. Even non-bank mortgages offer their pros and cons:

  • From an administrative point of view, this is a simpler option; you will have your money quickly in your money (within a few days, as opposed to a bank where application processing and approval takes weeks).
  • Nor is it necessary to supply as many documents and documentation as banks require.
  • These pros, however, are dearly redeemed by record high interest rates (sometimes up to five times higher than at the bank!) And fees. In the end, you are likely to pay much more to this institution than you would with a bank.
  • Be careful and choose a proven company in the non-banking sector, with whom you have good experience, such as your family member or close friend. Non-banking institutions are not subject to as strict state control and regulation by the CNB as is the case with conventional bank loans / mortgages. Unfortunately, there are companies among us that are susceptible to their clients’ real estate and set conditions that are impossible in the real world. Avoid credit predators!
  • Study the terms and conditions of the contract carefully. Instead of a low interest rate that works more as an attraction, notice the APR (Annual Cost Percentage Rate), which includes all charges or penalties for early repayment.
  • It often happens that simply delaying the installment by one day means repaying the entire claim within 10 days, including high penalties.

Non-bank mortgages are commonly of the nature of so-called American mortgages. below.

Types of mortgage repayment

Types of mortgage repayment

You do not have to repay the mortgage in the most common way, so called annuity , but also otherwise. You can choose for example repayment of linear, progressive, degressive, repayment of combined mortgage loan, or mortgage with the so-called floating rate . Choose the most appropriate option for you and agree on it with your bank as part of the terms negotiation process.

Annuity repayment

The most common way of repaying the mortgage is annuity payments, which have a fixed amount of interest during the fixation period (for the next fixation period the bank offers a new interest rate with which the client either agrees or refinances the mortgage – transfers it – to another bank where it will repay it conditions). Fixation can normally be chosen by the debtor for 1 year, or for 5 or 10 years.

The annuity repayment includes both the repayment of the debt itself and interest, with the ratio of the two items gradually changing: initially, the borrower pays more on interest and less on debt, and over time this ratio turns over.

Progressive

The progressive repayment of the mortgage loan is characterized by the fact that the installments increase over time. At the beginning of the debt repayment (for one year) the repayments are lower than in the following years. After this year, the Bank will set a fixed coefficient by which the installment will be increased for each new period.

Progressive installments allow easier furnishing of the house / apartment, etc. right at the beginning of housing, and are also suitable for novice employees who cannot count on the beginning of their career with high pay.

Degressive

The opposite of progressive installments are degressive installments, when the debtor repays initially more, and over time the amount of installments decreases, again according to the calculation of a fixed coefficient determined by the bank.

Degressive repayment, as its character suggests, is suitable for those clients who can afford to amortize the debt at first with high repayments, and want to repay less with the approaching maturity.

Linear

A specific and less frequent method of amortization of mortgage debt is linear payments. It has the great advantage for the borrower that the amount of interest decreases with each installment. How does it work?

In the case of linear repayment, interest is calculated each month on a new basis, based on the principal amount (ie on the part of the debt to be paid). As this principal decreases with each installment, the interest is gradually reduced. Therefore, the borrower regularly repays the amount of the monthly plan + the currently calculated amount of interest.

Initially, these payments are higher than would be the case with the repayment of the annuity, but there is a faster amortization of the entire debt, which is an undeniable advantage.

Repayment of the so-called floating rate mortgage

As the name implies, a floating rate mortgage is one for which there is no fixation, ie the amount of interest is variable.

Mortgage repayment with deferred principal payment

mortgage

Otherwise, this type of installment is called repayment of the so-called combined mortgage/mortgage loan. This repayment is based on the fact that for some time the debtor only pays interest to the creditor on the debt. After the agreed period, the repayment of the debt will start to pay, however, with a much shorter maturity.