Thanks to historically low mortgage rates, becoming a homeowner is now particularly advantageous. If borrowing money is not expensive, how to find your way among the various types of rates offered by financial institutions? These few lines will guide you in your steps.
Mortgage loan (or financing) is a long-term credit, secured by a real estate lien. This loan is usually achieved by a one-time payment of funds to the borrower, who agrees to pay interest and any amortization.
The mortgage loan usually covers 80% of the value of the property when purchasing a residential property intended to become the primary residence. The remaining 20% is the equity. Financial organizations usually split this debt into two ranks. The first row covers 66.6% of the value of the property, the second row corresponds to 13.4%. The following rule prevails: the 2th rank must be amortized over 15 years and at the latest at retirement age. You can, however, obtain 90% mortgage financing, as long as you pledge a certain amount of your own funds, for example from your pension fund, as collateral. The mortgage for second homes or luxury properties is more like 40-50% equity.
There are several types of rates: fixed, variable and Libor.
It is limited in time and determined at the time of signing. The term can be up to 25 years, but is commonly 10 years. This rate has the advantage of allowing you to calculate your budget accurately since, by definition, it will remain stable during the chosen period. However, there is some uncertainty at the time of renewal of the mortgage, as a higher rate could jeopardize your financial situation. You can cancel your mortgage at the end of the contractual term. At that time, you are also free to choose any other type of rate or to change banking institutions, this with a notice period of 3 to 6 months in general.
It depends on the movements of the money market. It can change at any time, up or down. The advantage is that it can be terminated at any time. This is why it remains the most expensive on the market and is only used for a transition period, during which the borrower needs flexibility. It is of course advisable to favor this loan in low periods, while ensuring that you have sufficient financial resources in case of increase.
It is also linked to movements in the money market – but European only. It is readjusted regularly (every 3, 6 or 12 months) and has the advantage of being theoretically lower than fixed and variable rates. On the other hand, it puts you in a situation of insecurity, because you will be permanently subjected to fluctuations. Moreover, it is contracted for a fixed period. If you terminate your loan, the financing institution will demand a penalty which can correspond to the total amount of the interests until the expiry of the rate or the framework contract. The Libor rate is particularly suitable for investment properties.
Rates vary between mortgage lenders (banks, insurance companies and pension funds), their source of funds and their specific strategy. Thus, some are more competitive on short terms, while others favour long terms. As an indication, a fixed rate currently corresponds to approximately 1% for 10 years, 1.4% for 15 years, and Libor at 0.6%. These days, fixed rate mortgages over the long term are the most common.
In making your choice, the main things to consider are: the assumed length of time you will hold the property; the maximum rate you can assume; and speculation on rate changes. In the case where an increase is assumed, it is interesting to fix the mortgage rate because the interest charge you will have to pay will remain the same. If not, it may be worthwhile to take advantage of the Libor rate in order to benefit from the decrease. It is possible to mix the types of rates and durations, by splitting the loan into several tranches.
Since the early 1990s, it has been found that mortgage takers who have gambled on falling rates by favouring a Libor rate are the winners, given that rates have fallen continuously.
To get a home loan at the best rate, you need to have a well-crafted mortgage financing package. To do this, various parameters come into play. The first is that of building up equity, which amounts to 20%. You will have to pay at least half of this equity in cash (savings not from the pension fund and/or personal loan). The notary fees (5%) must also be paid in cash.
The second criterion is that you have to pay a minimum of 20% of the equity.
The second criterion is the effort rate (or debt ratio). The amount of the mortgage must not exceed, in terms of charges, 33% of your income, i.e. one third of your salary. Financial institutions make a theoretical calculation based on a deliberately high interest rate of 5%. In addition to this, there is the standard depreciation, as well as maintenance costs corresponding to 1% of the value of the property. This budget offers a guarantee to the financial institution that the borrower can hold the load, even if interest rates were to rise in the future.
Finally, becoming a homeowner generates, on the part of the tax authorities, the calculation of a rental value that will be added to the buyer’s taxable income. However, there are ways to reduce this additional tax, by paying interest or by choosing the right way to amortize your mortgage (for example by contributing to a 3rdpillar policy). Finally, you can deduct flat-rate or actual maintenance costs for your property.
Each system has its advantages and disadvantages. Whether it’s a new acquisition or an investment property, a real estate finance advisor will be able to guide you to the best strategy to deploy. He will negotiate for you the best rates on the market, thanks to his large volume of business and the privileged relationship he maintains with his partners.