Also known as: Home loan, Mortgage loan
Mortgage
A long-term loan secured on a property. The bank lends most of the purchase price and the debt is repaid in regular instalments, usually over 20 to 30 years.
A mortgage is a loan secured on a property. The bank lends you most of the purchase price of a flat or a house and you return the money in instalments, typically over twenty to thirty years. Until the loan is repaid, a lien sits on the property, if you stopped paying, the bank could sell it and settle out of the proceeds.
What a mortgage is made of
Three numbers determine almost everything:
- Principal
The amount you actually borrow. It is not the purchase price: the bank finances only part of it, and you make up the rest from your own funds.
- Interest rate
The price of the borrowed money, expressed per year. On a mortgage it is agreed for the length of the fixed-rate period, after which it changes.
- Term
How long you will be repaying. A longer term means a lower monthly instalment but more paid in total: the interest runs for longer.
How the instalment is calculated
The instalment is an annuity, that is the same size for the whole fixed period. It is set so that the debt is exactly zero after the last payment:
- : the monthly instalment
- : the principal borrowed
- : the monthly interest rate, that is the annual one divided by twelve
- : the number of monthly instalments
Inside the instalment the split keeps shifting. At the start most goes to interest, towards the end almost all of it to the principal, that is called amortisation.
A worked example
You are buying a flat for €220,000. You have €40,000 saved, so you borrow €180,000 at 4% a year over 30 years.
The monthly instalment works out at €859.35.
Over the full thirty years you pay the bank €309,366: of which €129,366 is interest. You therefore pay more than two thirds of the original debt again on top.
In the first instalment €600 goes to interest and only €259 to the principal. It takes about fifteen years for the ratio to flip.
How much the bank will lend
Two limits decide. The first is LTV: the ratio of the loan to the value of the property, which the National Bank of Slovakia caps. You will therefore always need funds of your own.
The second is your ability to repay. The bank compares the instalment with your income, and a legally set reserve must remain once every instalment is deducted. Existing loans and credit cards therefore reduce what you can get, even if you are not drawing on them fully.
The fixed period and what follows
Your rate is agreed for the years of the fixed period, not for the whole term. Once it ends the bank offers a new one, and it may be substantially higher or lower. That is the moment to consider refinancing, that is moving the loan to another bank.
When comparing offers, look not at the interest rate alone but at the APRC: it includes fees and compulsory insurance, which makes the offers comparable.
What to watch out for
The most common mistake is deciding on the monthly instalment. Extending the term from 20 to 30 years cuts the instalment by hundreds of euro a month, but the total paid grows by tens of thousands.
The second is not budgeting for what comes with a mortgage: property insurance, possibly payment protection insurance, property tax and a reserve for repairs.
Work out your own figures, including the amortisation table and the effect of overpayments, in the mortgage calculator. Whether repaying faster beats investing is compared in the early repayment calculator.