To help you choose a home loan, there is a document that all the banks where you get a proposal present you, and that you should always analyze: the European Standard Information Sheet (FINE).
With one similar structure in all banks aims to facilitate the comparison between the various credit proposals. This document contains all the information regarding the total costs of each credit proposal, so you can check which option is cheaper or which best meets your needs.
Below, we highlight the main information that you can find at FINE and that you should look at more carefully before choosing among the credit proposals.
A very important piece of information that you should check at FINE is the interest rate applicable to the loan. There are three different modes, namely:
- Flat rate: the interest rate is always 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. That is, for example, in a 30-year loan, it is possible to fix the interest rate for a certain period, for example in the first 10 years;
- variable rate: the interest rate varies throughout the loan period depending on the variation of Euribor rates. Thus, the installment is variable throughout the loan.
Euribor + spread
Banks define that the interest rate on a loan is the Euribor at a given term plus a spread. Euribor is a reference rate in the interbank market in the euro area, serving as a reference for loans, namely for home loans.
There are fees Euribor with several terms, and in the case of housing credit the most used is six months.
As a rule, the 12-month Euribor rate is higher than the six-month rate, so It is important to check the rate used by the bank. Furthermore, in case the rate used is 12 monthsthis means that the installment is reviewed only every 12 months, that is, in practice the benefit will be fixed for one year. On the other hand, if the rate used is six months, your installment is updated every six months.
Regarding the spread, the same corresponds to the bank’s profit margin on the loan, which is always a fixed rate. However, there is always the possibility of renegotiating the value of the spread with the bank at any time.
In practical terms, if in a given loan, the spread is 1%, and if 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%.
In addition to interest, there are other costs on a home loanwhich you should take into account when analyzing the various proposals.
When applying for a home loan, the bank may charge various fees, namely:
- commission of file: it is a commission charged independently of the approval of the credit, and which aims to cover the bank’s costs with the analysis of the credit process;
- Evaluation Committee: this is a commission charged for the appraisal of the property by an expert. According to Bank of Portugal rules, in the case of properties for own and permanent housing, the maximum loan limit is 90% of the value of the same. So, in practical terms, if you want to buy an apartment worth €100,000, and it is valued by the bank at just €90,000, the bank can only lend you €81,000, which corresponds to 90% of €90,000;
- formalization commission: this is a fee payable upon conclusion of the loan agreement.
In addition to these commissions, there are also other costs throughout the loan period. These costs are related to the multi-risk insurance and life insurance, which are mandatory throughout the loan.
Indicators for comparing proposals
Global Effective Annual Rate (APR)
To analyze the various housing credit proposals, there is an indicator that you can find at FINE, which is the Global Effective Annual Rate (APR). This rate represents the total annual cost of the loan to the customer, measured as a percentage of the total loan amount. The same includes, in addition to interest, costs with commissions and insuranceso it is considered to be a more complete indicator than the interest rate for comparing bids.
Thus, it is possible that a credit proposal has a lower interest rate, but its APR is higher. In this case, you should choose the offer that has a lower APR, even if its interest rate is higher..
In a FINE, two APRs usually appear. The first does not take into account the spread bonus offered by the bank, in the case of contracting insurance and other products at the bank. The second takes into account the spread subsidized from the bank, thus being lower. Therefore, in order to compare the various offers, you must check whether or not you intend to contract the products at the bank. If your decision is in this direction, you should consider, for comparison purposes, the APR found in the Optional Associated Sales section.
Total amount to be reimbursed (MTIC) and reimbursement tables
Right on the first pages of FINE, there is an indication of the total amount to be reimbursed (MTIC) which corresponds to the total cost of the credit. That is, it has the indication of the total absolute value of the cost. In addition, it is also indicated the amount you pay for each €1 of borrowed amount. Thus, when comparing the various proposals, you should tend to choose the one with the lowest value. However, please note that this value on the home pages does not take into account the spread bonus associated with contracting certain products, such as insurance, through the bank.
Thus, if you intend to contract products, such as insurance, at the bank, to compare the various proposals, you must use the refund table, which appears on the final pages. In this table you can find a summary of the loan payment plan, which includes interest payable, commissions, insurance, among others. At the end of the table there is an indication of the Overall Amount Payablewhich considers the effect of spread subsidized. So, you should compare this value in the various proposals, and choose the one with the lowest cost.
If you have financial conditions and it is in your interest, know that it is possible to make early repayments of the loan. However, this action has a cost that varies, depending on whether the loan has a fixed or variable interest rate.
Thus, if you choose a fixed rate, the cost is 2% of the refunded amount. That is, if you amortize €10,000, it has a cost of €200. In contrast, in the case of a variable rate, as a rule, this cost is 0.5% of the refunded amount. That is, if you amortize the same €10,000, in this case the cost is only 50€.
In summary, when choosing a home loan proposal, you should not only consider the spread, but also consider all other costs, such as bank fees and insurance.