BUYING A HOUSE ON CREDIT: WHY IS IT SO IMPORTANT TO HAVE SAVINGS?

Even those who buy a house on credit should have some capital of their own, not only for the down payment, but also to cover all the expenses involved in the process.
Save at least 10% to 20% of the property value for the down payment.
 
Since July 2018, banks have not been able to finance home purchases for more than 90% of the property value, as a result of new rules applied by the Bank of Portugal to limit the granting of mortgage loans. As a result, most banks only offer loans of 80% or, at best, 90%, which means that the buyer must have between 10% and 20% of the value of the house in equity for the deal to go ahead.

For a property worth €100,000, this means that you must have saved between €10,000 and €20,000—and this is just for the down payment—but the math is easy to do: the more expensive the house you want to buy, the more savings you must have in order to complete the purchase and proceed with the mortgage. You can also look at it this way: if you have saved more over the years, you will have a nest egg that allows you to consider higher-priced homes when you decide to buy.

Similarly, having more savings not only helps you to have a wider range of options in terms of properties, but can also make a difference in the approval and conditions of your mortgage. If you have more money set aside, you will be prepared for any eventualities. For example, if the property valuation is lower than the purchase price, you will have to contribute more of your own capital, because the loan amount will decrease. Making a larger down payment, i.e., borrowing less money from the bank, can also help you reduce your monthly payment or the term of your loan.
 

Having savings is essential to cover taxes and other expenses

In addition to the down payment, it is important to remember that you will need to use your own capital to pay taxes and all expenses related to the deed and the mortgage process. Therefore, in addition to the 10% or 20% down payment, you should save an extra 3% to 5% to comfortably cover the transaction costs. The amount varies because it is also proportional to the value of the house you buy.

IMT, Municipal Tax on Onerous Transactions, is one of the most significant expenses when buying a home and is directly related to the value of the property. This tax can vary between 1% and 8% of the purchase price of the property, in the case of owner-occupied and permanent housing. Knowing in advance how much you will have to pay in IMT for the purchase of your new home is essential to understand if your savings are sufficient to cover this amount and not be caught off guard.

At the time of signing the deed, you will also have to pay stamp duty (IS) on the purchase and sale and on the loan. The former is calculated on the value of the deed or the property's asset value (whichever is higher) and the rate is currently 0.8%. Stamp duty on the loan is based, as its name suggests, on the value of the loan requested from the bank, and the rate can vary between 0.5% if the loan term is less than 5 years and 0.6% if it is longer.

These are the most significant expenses, but there are other costs associated with buying a home that you should be prepared for. These include bank appraisal costs, the cost of opening a file at the bank for mortgage approval, and, of course, the cost of the deed. All in all, it is a considerable amount that you should have in equity. As we have seen, when buying a property, even with a mortgage, having savings is a mandatory requirement in order to proceed with the transaction, and the greater your savings, the better prepared you will be to face the entire process.
 

Continue saving to pay off your mortgage

Saving is an excellent habit that gives you financial breathing room throughout your life, but for those with a mortgage, it can also be an excellent way to accumulate money to pay off the loan. After completing the home purchase process and having the loan approved, some people make a savings plan so that they have some capital to make partial repayments over time or a total repayment of the mortgage.

If this is your case, keep in mind that both partial and total repayments have costs. The amount may vary from bank to bank, but there is a maximum repayment rate of 0.5% of the amount repaid in variable interest rate loan agreements, and 2% in fixed interest rate loans.

These are the most significant expenses, but there are other costs associated with buying a home that you should be prepared for. These include bank appraisal costs, the cost of opening a file at the bank for mortgage approval, and, of course, the cost of the deed. All in all, it is a considerable amount that you should have in equity. As we have seen, when buying a property, even with a mortgage, having savings is a mandatory requirement in order to proceed with the transaction, and the greater your savings, the better prepared you will be to face the entire process.


Continue saving to pay off your mortgage

Saving is an excellent habit that gives you financial breathing room throughout your life, but for those with a mortgage, it can also be an excellent way to accumulate money to pay off the loan. After completing the home purchase process and having the loan approved, some people make a savings plan so that they have some capital to make partial repayments over time or a total repayment of the mortgage.

If this is your case, keep in mind that both partial and total repayments have costs. The amount may vary from bank to bank, but there is a maximum repayment rate of 0.5% of the amount repaid in variable interest rate loan agreements and 2% in fixed interest rate loans.


source: finantia-esm