To help you choose a mortgage, there is a document that all banks where you obtain a proposal will present to you, and which you should always review: the European Standardized Information Sheet (ESIS).
With a similar structure across all banks, its purpose is to facilitate comparison between the various loan proposals. This document contains all the information relating to the total costs of each loan proposal, allowing you to check which option is cheapest or best suits your needs.
Below, we highlight the key information you can find in the ESIS and which you should look at more closely before choosing between loan proposals.
Interest rate
One very important piece of information you should check in the FINE is the interest rate applicable to the loan. There are three different types, namely:
- Fixed rate: the interest rate remains the same throughout the loan, meaning that the installment amount remains unchanged. The fixed interest rate is agreed with the bank;
- Mixed rate: the interest rate is fixed for part of the loan. After this period, the rate becomes variable. For example, in a 30-year loan, it is possible to fix the interest rate for a certain period, for example the first 10 years;
- Variable rate: the interest rate varies throughout the loan period depending on changes in Euribor rates. Thus, the installment is variable throughout the loan.
Euribor + spread
Banks set the interest rate on a loan as the Euribor for a given term plus a spread. The Euribor is a reference rate on the eurozone interbank market, serving as a benchmark for loans, particularly for mortgage loans.
There are Euribor rates for various terms, with the six-month rate being the most commonly used for mortgages.
As a rule, the 12-month Euribor rate is higher than the six-month rate, so it is important to check which rate the bank is using. In addition, if the 12-month rate is used, this means that the installment is only reviewed every 12 months, i.e., in practice, the installment will be fixed for one year. On the other hand, if the six-month rate is used, your installment is updated every six months.
The spread corresponds to the bank's profit margin on the loan and is always a fixed rate. However, it is always possible to renegotiate a lower spread with the bank at any time.
In practical terms, if the spread on a given loan is 1% and the reference rate is the 12-month Euribor, which currently stands at around 0.5%, this means that the interest rate applicable to the loan would be 1.5%.
Other costs
In addition to interest, there are other costs associated with a mortgage, which you should take into account when analyzing the various proposals.
When applying for a mortgage, the bank may charge various fees, namely:
- Application fee: this is a fee charged regardless of whether the loan is approved, and is intended to cover the bank's costs in analyzing the loan application;
- Appraisal fee: this is a fee charged for the appraisal of the property by an expert. According to the rules of the Bank of Portugal, in the case of properties for own and permanent residence, the maximum loan limit is 90% of the property value. Thus, in practical terms, if you want to buy an apartment worth €100,000, and it is valued by the bank at only €90,000, the bank can only lend you €81,000, which corresponds to 90% of €90,000;
- Formalization fee: this is a fee payable at the time of signing the loan agreement.
In addition to these fees, there are other costs throughout the loan period. These costs are related to multi-risk insurance and life insurance, which are mandatory throughout the loan period.
Indicators for comparing proposals
- Annual Percentage Rate (APR)
To analyze the various mortgage proposals, there is an indicator that you can find at FINE, which is the Annual Percentage Rate (APR). This rate represents the total annual cost of the loan to the customer, measured as a percentage of the total loan amount. In addition to interest, it includes commission and insurance costs, so it is considered a more comprehensive indicator than the interest rate for comparing offers.
Thus, it is possible that a loan offer has a lower interest rate, but its APR is higher. In this case, you should choose the offer with a lower APR, even if its interest rate is higher.
In a FINE, there are usually two APRs. The first does not take into account the discounted spread offered by the bank if you take out insurance and other products with the bank. The second takes into account the bank's bonus spread, and is therefore lower. Therefore, to compare the various proposals, you should check whether or not you want to purchase the products from the bank. If you decide to do so, you should consider, for comparison purposes, the APR found in the Optional Associated Sales section.
- Total amount to be repaid (MTIC) and repayment tables
Right on the first pages of the FINE, you will find the total amount to be repaid (MTIC), which corresponds to the total cost of the loan. In other words, it shows the absolute total cost. In addition, it also indicates how much you pay for each €1 borrowed. Therefore, when comparing the various proposals, you should tend to opt for the one with the lowest value. However, please note that this value on the initial pages does not take into account the bonus spread associated with contracting certain products, such as insurance, through the bank.
Therefore, if you wish to purchase products such as insurance from the bank, you should use the repayment table, which appears on the final pages, to compare the various proposals. This table provides a summary of the loan repayment plan, including interest payable, commissions, insurance, and other costs. At the end of the table, you will find the Total Amount Payable, which takes into account the effect of the bonus spread. You should therefore compare this amount in the various proposals and choose the one with the lowest cost.
If you have the financial means and it is in your interest, you can make early repayments on your loan. However, this action has a cost that varies depending on whether the loan has a fixed or variable interest rate.
Thus, if you opt for a fixed rate, the cost is 2% of the amount repaid. In other words, if you repay €10,000, the cost is €200. In contrast, in the case of a variable rate, this cost is usually 0.5% of the amount repaid. In other words, if you repay the same €10,000, in this case the cost is only €50.
In summary, when choosing a mortgage proposal, you should not only consider the spread, but also all other costs, such as bank fees and insurance.
Source: Doutor Finanças