Key insights for understanding mortgage contracting
The contracting of a mortgage in the real estate market in Spain has been favored in recent months by significant development and growth, mainly driven by inflationary stability. This situation has been reinforced by the decision of the European Central Bank (ECB) to begin reducing interest rates.
This combination of factors has improved financing conditions, providing a more favorable path to credit and facilitating access to home purchases, which recorded a 5% increase in 2024, as well as the rise in mortgage signings, which grew by 11.2%, reaching 423,761 contracts. However, before proceeding with one, it is advisable to consider multiple aspects to make the most informed decision.
For example, the Bank of Spain reminds borrowers to thoroughly understand all the conditions and assess the real and final costs that may be involved in the process. Additionally, it recommends considering the monthly payments and possible improvements in conditions offered by banks.
What to consider before contracting a mortgage?
Before evaluating different options, it is important to understand the factors involved in contracting a mortgage. This process should not be seen as a mere formality, as it constitutes one of the most significant decisions in our lives. Therefore, understanding the concepts will be key to avoiding choosing a product that does not fit our real needs or financial capabilities.
In this regard, it is essential to compare and study all available options meticulously: the same formula will not be valid for everyone, so personalized studies tailored to each person’s financial situation must be conducted. Additionally, it is advisable to analyze the total cost, understanding all the expenses and commissions included in the process.
Different types of mortgages
- Fixed-rate mortgage. This type does not use the Euribor index or any other reference index to calculate its interest rate, so it is not affected by any fluctuations in these indices. The interest rate is determined at the time of signing and remains stable throughout the mortgage term, with payments only subject to changes if agreed conditions are breached. Currently, with interest rates still in positive territory, the average rate stood at 3.25% at the end of 2024, although it varies depending on the bank and applicable bonuses.
- Variable-rate mortgage. In the case of variable-rate mortgages, the interest rate fluctuates over time based on the Euribor’s performance. Additionally, it consists of a fixed margin set by each bank, expressed as a percentage added to the variable interest rate, forming the final annual percentage. This type of mortgage is often the most chosen in low-interest environments, as it usually offers more affordable conditions than a fixed-rate mortgage. However, it is important to consider that the mortgage will adjust based on the Euribor: if the index is low, borrowers benefit, but if it is high, monthly payments can double, potentially leading to liquidity problems.
- Mixed-rate mortgage. This type combines both previous types. During the initial phase of the loan, the monthly payment follows a fixed rate before transitioning to a variable rate.
Relevant expenses and key concepts
- Nominal Interest Rate (TIN). Also known as TIN, it represents the cost that a bank charges for offering the loan over a specific period, excluding commissions or additional expenses. It is shown as a percentage and is commonly associated with the APR, although they are not the same. This rate is agreed upon in advance and remains fixed.
- Annual Percentage Rate (APR or TAE in Spanish). A percentage indicator of the mortgage’s effective cost, which includes the interest the borrower will have to pay. It provides insight into the real cost the borrower must cover, including commissions and additional expenses. It is useful for comparing different mortgages, as all banks must calculate it using the same methodology.
- Reference Index. The Euribor, short for “European Interbank Offered Rate,” is the benchmark index for most variable-rate mortgages. Its recent declines have been decisive in the real estate market, generating a positive outlook and helping to lower mortgage payments.
- Opening commissions. This is a percentage that some banks add to the total mortgage amount when granting it. In some cases, the borrower must cover this cost, which generally ranges between 0.1% and 2% of the loaned capital.
- Repayment period. This refers to the time frame within which the loan is repaid, which may vary depending on the agreed financing. Fixed-rate mortgages typically have shorter terms, with a maximum of 20 years, compared to variable-rate mortgages, which usually range between 30 and 40 years. There are different types of early repayments: Partial early repayment, aimed at reducing either the total debt or the number of years remaining. Since the final amount on which interest is calculated is reduced, monthly payments also decrease. Total early repayment, which involves fully settling the outstanding debt. In both cases, any associated commissions must be considered.
- Mortgage discounts (bonifications). This is one of the most important factors when choosing a bank for a mortgage. It refers to a discount or reduction in the interest rate based on the banking products that the borrower contracts along with the mortgage. The discount depends on the number of additional products, such as life or home insurance, and can result in a significant reduction.
- Appraisal costs. The appraisal is an estimate to determine the value of the property so that the bank can assess the risk involved in granting the mortgage. If the appraisal value is lower than the purchase price, the bank may reject or limit the loan amount, requiring the borrower to contribute more capital. Conversely, if the appraisal exceeds the purchase price, the borrower may be able to obtain financing of up to 80% of the purchase price. The process is carried out by an appraisal company, and its cost is borne by the borrower.
- Registration fees. These are the fees paid to the Property Registrar, first for obtaining information on the property and second for registering the mortgaged property. Since the enforcement of Law 5/2019, as of March 15, banks cover this cost.
- Notary fees. Various notarial processes are involved. When signing and structuring the contract—that is, when the notary officially certifies the mortgage deed—the bank covers this cost. However, if the borrower requests a copy of the mortgage deed, they will be responsible for the cost.
- Management fees. These apply to the registration of the property deed in the Property Registry. This step involves administrative procedures, and the cost is covered by the bank granting the mortgage.
Other relevant concepts
- Grace period. This is a period during which the borrower can pay a reduced monthly installment after finalizing the mortgage, covering only interest. It is typically used in cases of financial difficulty, although it is important to understand that interest will accumulate, increasing the total debt.
- Subrogation commission. Subrogation occurs when the borrower decides to switch the bank with which the mortgage was contracted. This commission, which was a free process until 2025, is charged for the cancellation of the loan and must be paid to the previous bank.