The total cost of a home loan does not only depend on the interest rate associated with the offer. There are many other elements that inflate the bill to name only the borrower insurance, the price of the financial guarantee or even any administrative fees. Discover in detail the particularities of these expenditure items.
When we talk about borrowing rates, it is already necessary to know how to differentiate between the nominal rate and the APR. Nominal rate means the gross rate used to determine the interest due to the lender. This indicator is modeled on the key rates applied by the European Central Bank (ECB) to which the bank adds the cost of credit transformation, the cost of non-payment risks and its own remuneration. The lower the normal rate, the lower the total cost of credit, which is why borrowers persist in negotiating low rates when taking out the loan.
Note that there are two types of nominal rate:fixed rate and variable rate. As its title suggests, the fixed rate does not change throughout the life of the loan. The borrower knows exactly the amount of monthly payments to be paid each month. On the other hand, the variable rate is indexed to financial indices and can go up or down depending on market fluctuations. Given the historic decline in interest rates in recent years, very few banks today offer this variable rate. The APR or Effective Annual Rate for its part makes it possible to know the overall cost of the loan. It includes not only the nominal rate, but also administration fees, guarantee fees, compulsory insurance and brokerage fees.
The price of borrower insurance plays a huge role in the total amount of a mortgage. Specifically, it can represent up to 30% of the general cost of borrowed capital. Under these conditions, it is more than crucial to choose the right contract in order to obtain low contributions with the best protection. At the time of their meeting with the banker, borrowers will be offered borrower insurance contracts from their bank. The latter are advantageous insofar as they facilitate access to credit. However, their positive point ends there since in addition to being expensive, they do not necessarily offer the guarantees adapted to the profile of the subscriber. In this context, it is preferable to move towards the contracts available from insurers outside the bank which are more competitive in terms of price and which are established in a tailor-made way.
To protect itself from a possible repayment default, the bank will require a guarantee which may take the form of a mortgage or a surety. The mortgage allows him to recover the borrowed funds in the event of non-payment by seizing and then reselling the property. In general, the price of this guarantee represents 2% of the capital borrowed. In addition, there are several ancillary costs including notary fees, stamp duties and land registration tax. With the surety, a specialized surety organization acts as guarantor for the borrower who has previously paid him contributions. If the debt is not repaid in accordance with the rules, the bank has the right to demand payment from the guarantor. This guarantee costs between 2 to 3% of the amount borrowed.
The total amount of a mortgage will also depend on the application fees, the cost of which depends on the commercial policies of each banking organization. In general, the costs are defined according to the capital borrowed or are calculated on a flat-rate basis. It is accepted that they represent between 500 to 1200 euros or are fixed between 0.4 to 1% of the total cost of the credit.