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What should I take into account when choosing a mortgage?

A mortgage loan, or mortgage as it is commonly known, is one of the biggest financial commitments that you’re likely to make, both on account of the sum involved and the repayment term (usually 20 to 30 years).

The following are important considerations when choosing a mortgage loan:

Loan amount and repayment term
These are the first two aspects to consider when applying for a mortgage. Nowadays, financial institutions, with rare exceptions, will lend no more than 80% of the appraisal value or purchase price of the property. Therefore, it is advisable to have savings to cover the remaining percentage and an additional 10% or 15% to cover the taxes and expenses associated with buying a home and signing the mortgage deed.

On this point, we should also bear in mind that the financial institution will analyse your capacity to repay the loan. The financial institution will assess your income and outlays and will apply the rule that your mortgage repayments should not exceed 35% or 40% of your income.

Types of mortgages
You should choose the type of mortgage or interest rate that is most beneficial or suited to your lifestyle. There are three types:

- Fixed: where the interest rate remains stable throughout the term of the mortgage.
- Variable: where the interest rate fluctuates according to the market throughout the term of the mortgage. This is calculated using the formula: interest rate spread + benchmark interest rate. The interest-rate spread is agreed between the customer and the bank (and remains the same throughout the loan), and the benchmark rate is taken from the official reference rates established by the Bank of Spain, with the Euribor currently being the most commonly used.
- Mixed: a combination of the two previous formulas. For a period of time, normally at the start of the loan, a fixed and stable interest rate applies. It is usually applied for more than one year, and you can currently find mortgages of up to 15 years, following which a variable rate is applied and the instalments fluctuate based on the value of the benchmark rate at the time.

Term and repayment instalment
These two concepts are linked. They are inversely proportional: the longer the term, the lower the monthly instalment, and vice versa. Mortgage loans tend to be for large amounts, given that they are usually provided to purchase a home. As a result, the repayment term tends to exceed 10 years and can be as long as 30 years. While it’s true that the shorter the term, the lower the interest you have to pay, it is also true that the instalments will be higher. Therefore, it is important to strike a balance between these two concepts before choosing a mortgage.

Commissions
Financial institutions may charge fees for the different paperwork associated with a mortgage loan. Some examples include:

Arrangement fee:
This is charged for setting up the mortgage and making the money borrowed available. It is usually calculated as a percentage of the loan amount.

Commission for early repayment, in part or in full:
Financial institutions often charge a commission for early repayment, in part or in full, of the outstanding capital.

In addition, there are other products such as insurance (home, life and payment protection) which can be taken out alongside the mortgage.