Basic concepts to retain
We begin this article with the basic concepts to take into consideration when talking about interest rates on housing credit.
|MTIC||Total Amount Imputed to the Consumer.|
|APR||Annual Effective Global Rate.|
|SO||Nominal annual rate.|
|EURIBOR||European Interbank Offered Rate.|
|Spread||Component of the interest rate that is added to the EURIBOR, freely defined by the credit institution.|
|Variable interest rate||It results from the sum of the EURIBOR and the spread and varies over the crediting period depending on the change in the EURIBOR.|
|Fixed interest rate||It is freely defined by the credit institution and remains unchanged until the end of the contract.|
|Mixed interest rate||In loans contracted at the mixed rate, there are periods when the rate is fixed and others where it is variable.|
Now that you have an overview of all the concepts that you should keep in mind, we turn to the detailed explanation of all interest rates on housing credit as well as the payment modalities by which you can choose.
Know the interest rates on housing credit
The spread is a component of the interest rate freely defined by the banking institution for each credit it grants. Generally, this rate is included in the interest that the bank charges the client and represents the profit that the same will receive for the loan granted.
When lending money, the bank is taking a risk, and the higher that risk, the higher the spread can be.
The risk varies from customer to customer, and some of the factors that determine it are your credit history, the ratio between the amount to be financed and the value of the guarantees given to the bank, monthly net income, professional status, type of employment contract, other savings or assets that the applicant may have, among other aspects that may depend on each institution.
In addition to these factors, the value of the spread can also vary depending on the contracting of other products or services of the bank by the customer, such as, for example, the acquisition of a credit card, the constitution of a Retirement Savings Plan ) or the domiciliation of the salary.
Since the spread will influence the cost of the loan, it is important that you compare all the existing offers in the market in order to enjoy the most competitive.
The European Interbank Offered Rate (EURIBOR) is the reference rate of the Interbank Money Market (MMI), resulting from the average of the prices provided by a group of European banks.
Interest rates on housing loans are, as a rule, indexed to the EURIBOR. Thus, the higher the value of the index (in this case, the EURIBOR), the higher the benefit, since interest payable will be higher.
The EURIBOR is variable throughout the credit agreement and according to the chosen period (between a week and 12 months). In Portugal, the most used indexes are the EURIBOR at 6 or 12 months.
Annual Nominal Rate (TAN)
The Annual Nominal Rate (TAN) is the rate used for all types of operations (credits or short-term investments) involving interest payments.
In the case of interest rates on housing loans, and in particular on a variable rate basis, the TAN is the sum of the spread and the EURIBOR.
Annual Effective Annual Rate (APR)
The Annual Effective Global Rate (APR) is one of the most significant when it comes to interest rates on housing credit. This represents the cost of credit, since it contains all the charges associated with the loan, these being:
– Interest, commissions and taxes;
– Insurance required to contract the loan;
– Costs related to the maintenance of the account that must be opened for mortgage loans;
– Fees charged in the mortgage register;
– Costs that may exist associated with payment transactions;
– Any subsidies on the spread.
The APR varies according to the amount of funding and the banking institutions are obliged to disclose this rate in accordance with the legislation in force.
If it offers some kind of promotional fee for the credit, it is the bank's duty to inform the consumer and clarify the amount of the APR with and without the discount.
For the purposes of comparison, it should be attentive to the amount of the APR presented by each financial institution, since this rate represents the total cost of the credit.
In addition, when comparing the proposals of the different institutions, it should also take into account other benefits inherent in the products that allow the interest rate subsidy, such as a remunerated account or a credit card with a good percentage of cashback.
Types of interest rates
There are three types of interest rate on housing loans by which you can choose to repay your loan: variable interest rate, fixed or mixed.
# 1 – Fixed interest rate
If you opt for the fixed interest rate modality, you will be paying the same installment for the entire period of the credit agreement. In this way, it will not be exposed to the risk of its variation.
This interest rate is established by the credit institution in each contract, taking into account the customer's credit risk, the ratio of loan-to-value, its cost of financing and the period of fixing thereof.
# 2 – Variable interest rate
If you choose the variable interest rate modality, your installment will fluctuate during the crediting period. This interest rate is the result of the sum of two factors: the EURIBOR (index) and the spread.
The EURIBOR is variable over the term of the contract and depending on the term chosen. For example, if the consumer chooses 12-month EURIBOR at the end of this period, his monthly installment is revised and may decrease or increase depending on the rates at that time.
Currently, because the EURIBOR is negative, the variable interest rate contracts are more competitive in relation to fixed rate contracts.
# 3 – Mixed interest rate
There is also the option of mixed interest rate. With this modality the client can choose to contract his mortgage with a fixed rate in the first 10 years, for example, moving to a variable rate indexed in the remaining period.
After looking at all the above factors, it is important that you take into account the MTIC (Total Consumer Amount) when choosing the banking institution for your home loan. It is this that defines how much you will pay, in the end, for the entire loan requested.
Information on this amount is provided in the FINE (European Standardized Information Sheet) which the bank or financial institution is required to provide at the time the loan is loaned, before the client accepts the offer.