If you’re planning to buy your first house, moving home or staying put and refinancing, you might want to make an in-depth assessment of your financial situation before choosing a specific home loan package. There are many ways to borrow money to help you buy your house and here we explain how home loans work, how they differ and how to borrow sensibly.
The classic home loan entails you borrowing a sum of money and repaying it back with interest over a period of time. But it’s important to be aware that a home loan is secured against your home. So if for any reason you can’t repay it, the lender can sell your home to recover its money.
Most banks offer two types of home loans – variable-rate and fixed-rate loans. The variable-rate home loan is the typical loan taken by the majority of home buyers. Normally the rate to be paid is calculated as a fixed margin over the bank’s base rate. Consequently, payments made by the borrower on the outstanding balance of the loan may change over time when the bank revises its base rate.
On the other hand, a fixed-rate home loan is taken out for a set period with a set interest rate. At the end of the fixed-rate period your loan will be converted to a variable interest rate, unless you decide to opt for a new fixed-rate contract, if available. A fixed-rate home loan can be good if you want to carefully budget your repayment – knowing exactly how much you need to repay means you can plan accordingly and gives you a degree of certainty and security. Fixed loans are a better option if there is an expectation of an escalation in interest rates over the medium to long term. However, if the opposite happens and interest rates fall drastically, you will be stuck with a higher interest on your loan.
The interest rate is calculated by taking a base rate determined using indices set by money and financial markets, and adding a margin, or spread, representing the difference between the index and the actual rate applied.
If you’re looking for a new home but haven’t sold your present house, you may be able to take out a bridge loan. Bridging loans serve to finance the purchase of your new property, pending the sale of your existing property. The bridging loan will then be repaid from the proceeds of sale of your existing property.
This type of home loan gives you the opportunity to repay the interest only, with the capital to be repaid in one lump sum at the end of the term (which normally varies from a maximum of five to six years). An interest only home loan may be used to end-finance the purchase and/or completion of property for use as a main or second residence. When applying for an interest only home loan, you will have to indicate to the bank the intended source of repayment, for example, the sale proceeds from a property or the maturity of an investment.
There are banks which offer the facility to pay the interest only during the first few years of the loan. The loan is then converted to a capital repayment method for the remaining term and you will then have to repay capital and interest. This type of home loan alleviates the burden in the first few years after buying a house but one has to keep in mind that by not repaying any of the capital during these first years, it will take longer to settle the full amount of the loan and hence pay more interest overall.
In terms of the Credit Agreements for consumers relating to residential immovable property regulations (link), banks are obliged to provide the consumer with general pre-contractual information prior to the conclusion of a home loan agreement.
In fact, we urge you to check the following list of charges that you might have to pay:
- before the contract (e.g. processing fees);
- during the contract (e.g. notary, architect, and registration fees);
- after the contract (e.g. commitment fees and periodic updates of land registry searches);
- early repayment fee;
- when settling the outstanding balance of the loan thereafter (e.g. fees to cancel hypothecs); and
- if you terminate your loan by refinancing it by another bank loan.
Most importantly, in the pre-contractual information given to you, the bank should provide you with the European Standard Information Sheet (‘ESIS’), which shall contain all the information on the loan, on you and on the institution providing the loan. One of the points you can use to compare which Bank you prefer is the Annual Percentage Rate of Charge (APRC) which will be calculated on the basis prescribed by law and represents the actual cost of the loan, as in addition to the rate of interest it includes any charges payable to the bank in relation to the borrowing facility.
Before deciding to purchase a property, it would be wise to shop around to get an idea of how much you can borrow. Banks will normally take your gross annual income as a base to determine the amount that you can borrow. As a maximum, the repayment on your home loan should not normally exceed 25% to 30% of your gross monthly income. The lender will typically ask you to pay an agreed percentage of the purchase price which will usually be up to 10% (the bank will lend you the difference).
When you eventually find your ideal property and the best deal on your loan, you will have to fill in a loan application form. At this stage, the bank will ask you for various documentation, such as the following:
- Your I.D. Card/s or passport/s;
- Evidence of income, FS3 forms (overtime and part-time work may not be taken into consideration) and/or tax returns (as the case may be). The bank will not normally rely on non-official documents which may attest income you may be earning;
- Statements of your bank account, if you bank with other institutions (other than the lending bank);
- Records of any financial commitments (existing loans or credit advances);
- In case of non-residents, copies of evidence of income, settled utility bills, Bankers reference and bank statements are required;
- Architect’s property report and valuation;
- Architect’s estimate of costs (where applicable);
- Building permits, layout plans and site plans (where applicable);
- Preliminary agreement/deed of acquisition;
- Ground rent receipts (if applicable);
- In case of request for a re-finance, copy of sanction letter and loan statements;
- Other documentation as required by the bank.
If your home loan is approved, the bank will issue a sanction letter with the terms and conditions governing your loan. The sanction letter will outline the amount and purpose of the loan, the rate of interest being charged, the monthly repayments, the duration of the loan (which tends to range between 35 to 40 years) and the APRC. The sanction letter will also define the legal and processing fees that will have to be paid (if any), early and/or late repayment fees and any commitment fees (if applicable). The type of security required (such as life and home insurance and hypothecs on the property being purchased) will also be clearly explained. Finally, the sanction letter will also include an explanation of the ‘events of default’ and the course of action that will be taken by the bank in such instances.
If you decide not to take a loan with a bank after a draft sanction letter has been issued, your bank may decide to apply a fee for the administrative work it incurred for processing your loan application. Double check with the bank about this charge to avoid surprises.
Pre Contractual Information (HOME LOANS)
The General tariff of charges provides information in a standard format. Borrowers may be offered different terms and conditions tailored to their individual situations. The lender, once it has received information on the borrower’s needs, financial situation and preferences, provides the borrower, free of charge, with the European Standardized Information Sheet (ESIS). This form sets out the information on the customized offer that the borrower can use to compare with other offers available in the marketplace.
The borrower must be given the ESIS without delay, before committing to any loan contract or offer. The ESIS must also set out the terms and conditions of the contract based on the borrower’s characteristics and needs.
Before signing the loan agreement, the borrower has the right to a reflection period of at least 7 days to compare the different offers, to consider their terms and conditions, and to make an informed decision.
The 7-day period starts when the borrower receives a binding offer from the lender. During this period the offer is binding on the lender and can be accepted by the borrower at any time. The offer must be accompanied by the ESIS, unless the ESIS was provided earlier or the features of the offer does not differ from the information contained in the earlier ESIS.
In case of a home loan, the bank can exercise the right to repossess your property if you do not keep up with the payments on the loan. However, repossession of property is exercised as a last resort.
Before resorting to this measure, the bank usually tries to follow the following procedures:
- Ask the customer to settle his/her arrears from an account which he/she may hold with the bank;
- Offer an alternative repayment arrangement to better suit his/her circumstances;
- Ask the customer to liquidate assets, to reduce the amount due to the bank.
The bank can also agree to a repayment moratorium period within which the customer will be able to sell assets/property over a period of time.
If the customer fails to co-operate towards the repayment of the debt, the bank will proceed with legal action to protect its interests.