When one has already gone through the subscription of a mortgage , its operation is obvious. Conversely, I realized that many future borrowers who buy their first home for the first time have a very vague idea of how a bank loan works . This is also often the case for the PTZ 2018 and its latest regulatory changes.
How does a home loan work ? How much can I borrow? How much will I pay back? What is the purpose of borrower insurance ? How is the cost of a credit calculated and what criteria does depreciation depend on ? What is TEG ?
So many complex concepts for the amateur in the field and it is essential to master before performing a mortgage simulation to know its borrowing capacity from a bank.
Getting the best rate is not everything and I tried to synthesize and popularize the essentials to know about real estate credit to provide help to all those who need it. To go further and deepen the financial mechanisms of Credit, I invite you to read this exciting guide .
Definition of mortgage
A mortgage is a sum of money lent by a banking institution and intended to finance the purchase or the construction of a principal residence, a secondary residence or a housing intended for the hiring.
This sum of money is repaid by the borrower during a defined period and with interest paid to remunerate the bank which lends you the money.
Several elements characterize a mortgage and allow to define the calculation:
- the amount borrowed (usually equal to the amount of the transaction to which the personal contribution is deducted)
- the duration of the loan
- the amount of monthly payments
- the amount of insurance and guarantees
- application fee
- the interest rate (fixed or variable)
- the cost of credit
The interest rate and the insurance rate are a capital element of the mortgage since they have a direct impact on the amount of the monthly payments, on the cost of credit and also on the duration of the loan.
Regulation of mortgage lending
When subscribing to a mortgage , the borrower is protected by a strict law of the Consumer Code ( articles L. 312-1 and following ).
This law imposes a ten-day cooling-off period for all borrowers (Scrivener Act).
The Neiertz law also regulates the area of household over-indebtedness.
Determine borrowing capacity
To finance your real estate project, the first step is to determine your monthly repayment capacity . It is calculated according to its income and can not exceed a debt ratio of 33% .
This means that a couple who earns € 4,000 net per month can not exceed a monthly repayment for his home loan of € 1,320, if he has no other fixed charge (personal loan, car loan, rent, pension, etc.).
Indeed, the banks consider that a debt ratio higher than 33% is too risky since it is necessary to keep a sufficient remainder for all current expenses. I would add that it is even better, as far as possible, to be as much as possible below this 33% to prevent the unpredictable.
Once the monthly repayment capacity is determined, it is then possible to determine its borrowing capacity , ie the maximum amount that a bank will likely lend you.
The borrowing capacity is obtained by multiplying the monthly repayment ability for the duration of the mortgage and the total effective rate (APR) .
The Effectig Global Rate (TEG)
The TEG is the interest rate that represents the real cost of a home loan. It is defined by the article R313-1 of the Code of the Consumption .
This rate includes the main interest rate of the mortgage but also its associated mandatory costs such as the cost of insurance, guarantees and fees.
The TEG determines the amount you will have to pay in exchange for the loan amount.
Because the credit institutions are not philanthropists in addition to repaying the entire amount lent, it will be necessary to guarantee and remunerate the service rendered.
One of the mandatory associated costs that go into calculating the TEG is Borrower Insurance.
In fact, a home loan must be covered by a number of guarantees such as death and disability , incapacity for work or loss of employment . These guarantees protect the banks but also the borrower against the risk of not being able to pay the deadlines of his loan in case of accident of life (illness, death, disability, unemployment …).
In these cases and depending on the terms of the contract, the bank may partially, totally or temporarily repay the monthly payments.
A couple will be able to choose the percentage of insurance they want to put on each head. 100% on each head means for example that in the event of the death of one of the two spouses, the one who remains will no longer have to repay the mortgage credit subscribed jointly, the bank will take care of it.
75% on each head means that in the same situation, the remaining one will have to pay 25% of the refund, the bank taking care of the remaining 75%.
The amount of insurance will obviously be lower as the percentage chosen is also … A fair dosage that depends on the situation of each.
Finally, a bank will systematically offer you group insurance as part of your credit. Remember that the Lagarde Act now allows you to use a delegation of insurance , that is to say to subscribe elsewhere.
Guarantees of a mortgage
Banks are also asking for guarantees. They allow them to protect themselves in case of default of the borrower, ie to sell the financed property to recover the sums lent.
It entitles the bank to have the house seized and auctioned in the event of default.
The lender’s privilege
This guarantee works on the same principle as the mortgage. On the other hand, it can only guarantee on existing goods (old, new or land).
It refers to a person who agrees to repay the sums due to the bank when the borrower does not arrive himself.
This is particularly the case of the mutuals of the Public Service (National Education, RATP, Post Office, Police …).
The best known is the CASDEN, which allows employees of the National Education and public research establishments to benefit from a guarantee at no cost.
Collateral is a contract by which the borrower remits a thing of sufficient value to its creditor to secure the security of the debt. These can be life insurance contracts or safe investments.
The repayment term of a mortgage
The repayment term of a mortgage can vary from a few years to several decades. The longer this period is, the lower the interest rate proposed. This is normal since a bank that is committed to a long term will take more risks than a shorter duration.
Moreover, in the vast majority of cases, for a conventional real estate loan , the amount of interest is calculated in relation to the capital remaining due (the amount borrowed still to be repaid).
Thus, the more one advances in the repayment of the loan, the less interest is important. At constant monthly payments, the repayment of interest is therefore made especially at the beginning of the term of the loan to the detriment of capital. It is for this reason that it is customary to say that in the first years of a mortgage , one pays almost only interest. This amounts to saying that one starts by remunerating the bank for its service rendered, before repaying the loaned capital itself.
Thus, reselling a property in the early years of his mortgage at the same price as that of his purchase is rarely profitable. It will have been repaid almost interest and it will repay the proceeds of the sale to the bank, almost without additional value.
The evolution of the repayment of the capital loaned by a bank, without taking into account interest, is called amortization .
Example: here is the amortization chart (capital and interest) for a real estate loan of € 100,000 over a period of 15 years and at a fixed rate of 4%. After 15 years, the borrower will have paid € 33,143.83 of interest and reimbursed € 100,000 of capital. The cost of credit is therefore € 33,143.83.
At the same rate over a period of 25 years, the interest paid would have been € 58,351.05. And even more since over a longer period, the rate would have been too.
For this reason, the more a mortgage is contracted over a short period, the more profitable it is for the borrower. Nevertheless, a longer duration makes it possible to borrow more. It is therefore important to measure this element wisely.
Amortization of a mortgage (Source: Patrithèque)
Always for a loan of 100 000 €, here is the cost of the mortgage according to the rates of the moment and the duration of repayment chosen.Cost of a mortgage according to its duration (Source: MeilleurTaux)
The costs and options of a home loan
It is also important to be vigilant about ancillary costs and subscribed credit options. Among the costs, for example, file fees or current account maintenance fees since your wages must be domiciled in the bank where the credit is taken out.
From one bank to another, these fees can significantly increase the rating. Do not hesitate to negotiate!
The options are generally the modularity of the repayment dates and the early repayment of the mortgage.
These options are useful if, during a change in financial situation, the borrower wishes to repay more per month and thus adjust the maturity of the loan to be repaid or outright pay off his loan (prepayment).
As surprising as it may seem, these options are not always free and a bank will charge you for wanting (and being able to) pay back more and more quickly.
The repurchase of mortgage
The repurchase of mortgage consists in renegotiating a loan subscribed at a higher interest rate than those prevailing on the market at the time of the repurchase.
This operation is generally very profitable if it is carried out in the first years of the credit, since as said before, it is during these years that the amount of interest is the most important.
Typically, the buyout will be from a competing bank, but some banks agree to renegotiate their own loan.
During this operation, the competing bank will buy back your credit at the initial bank and offer you a new financing plan at a more attractive rate.
Fees will be required. They generally amount to a maximum of 6 months of interest on the amount repaid without exceeding 3% of the outstanding capital. Despite these costs, if the period is favorable, a credit buyback can achieve real savings.