make the decision to buy a house with a home loan it can be overwhelming due to the amount of information that needs to be absorbed. But it is important that, before proceeding, know what to do.
Assess the financial conditions and the effort rate will help you figure out how much you can pay for the down payment and installment for the credit. And if you are informed in advance about the conditions that may be offered to you on credit, it’s easier to make decisions later. In this article, we try to explain the steps to follow before taking out a home loan.
1. Know what you are looking for
Before evaluating financial conditions to take this step, you should first consider other factors.
Know the place where do you want to buy the house, what is the property typologyif it is preferable apartment or houseif it is important to be close to a transport zonethe preference for to walkwant or not terrace or balcony… These are all questions that you must know how to answer in order to make a decision.
Also ask yourself what the use that you will give the house. It could be a house for the future, or for a few years only. If you are thinking, for example, increase family or come to work remotely and you want this property for this purpose, you should consider this in your search.
2. Calculate how much you can afford
To take out a home loan, it is necessary meet the conditions for such. That is, one of the first things that the bank evaluates to know if it is eligible or not for credit, is the effort rate. And what does this concept mean?
THE effort rate represents the relationship between the monthly net income of a household versus the expenses the same. In this way, the banking institution can know if it has the financial capacity to support the monthly installment of the credit in question.
In the case of housing credit, the effort rate must not exceed 30%. For example, if a household with two holders receives a monthly net income of 2,000 euros, the mortgage loan installment cannot exceed 600 euros.
Therefore, you should simulate your household’s effort rate before consulting the bank. This is to give you an idea of the maximum value of the property you can buyand, consequently, it can pay monthly of provision.
So, if the effort rate is higher than 30%, you already know that in order to get the financing, you have to reduce some expenses until you reach the necessary financial conditions. For that, you can review your credits, whether with credit cards, car loans or personal loans, to adjust the budget when a new installment arrives. Can also merge all credits into a consolidated credit.
But remember that, in order to take out a home loan, you also need to have money to give. At the time of hiring, it is necessary to give a part of the total value of the property, since the bank does not lend 100%, pay taxes and bank commissions.
If you decide to move on to home buying, you don’t have to go through this process alone. Doctor Finance can accompany you, step by step, and help you find the best financial decisions.
3. Accounting for the total cost
Currently, the Banks do not finance 100% of the value of the property (deed or appraisal, whichever value is lower). Therefore, it is necessary to be careful to give having to give an entry.
At most, the bank can finance up to 90% of the valueso if a house costs, for example, 200,000 euros, you will have to give at least 10% of that amount: 20,000 euros.
This is an amount paid to the seller, as a rule, at the time of signing the promissory purchase and sale agreement (CPCV), in order to guarantee the property until deed.
Taxes: IMT and IS
But the initial costs do not stop at the entry price. Still it is necessary to pay taxes when buying a property with a home loan. At issue is: the Municipal Tax on Onerous Real Estate Transactions (IMT) and the Stamp Duty (IS).
O amount of IMT you have to pay varies depending on the type of property, if it is urban or rural, the location, if it is located in mainland Portugal or in the islands, and if it is for own and permanent housing or secondary/investment. Your rate may vary between 1% to 8%and there may still be situations in which it is exempt.
The Government has recently updated the IMT values, so the exemption values have also changed. Now you can have exemption from IMT if the house is for own and permanent housing and the value declared in the deed does not exceed 93,331 euros in mainland Portugal, or 116,664 euros in the autonomous regions.
If you want to know the amount you will pay this tax, already knowing the information regarding the property you are going to buy, you can use the IMT Simulator of Doutor Finanças.
Regarding the IS, this is the oldest tax in the Portuguese tax system. It is a tax applied on the purchase and is equivalent to 0.8% on the carrying amount.
Finally, you still have to pay bank commissions. In addition to the down payment and taxes, there are also process expensesbefore the deed and payable on the same day.
More specifically, before the deed, there are the following expenses: the dossier committee and the evaluation committee; and on the day of writingpays the formalization fee, the purchase registration, the mortgage registration, a certified copy of the contract and the deposit of the Authenticated Private Document online. The amounts may vary from bank to bank, but, on average, can range from 1,350 euros to 1,680 euros.
Also read: I want to buy a house. How do I know if I will bear the expenses?
4. Find out about credit conditions
Rates: variable, fixed or mixed
Before taking out a home loan, you must also know the conditions that may be offered to you. This is because you will have to make decisions, so it is better if you are informed in advance.
Fixed, variable or mixed rate. What to choose in housing credit?
For example, the rate type what will choose for credit. There are three types of fee: variable, fixed or mixed. And what is the difference between each one?
THE variable rate on a home loan varies according to Euribor: the most common index for this credit in Portugal. Euribor results from the average of fees charged by European banks. By choosing this rate, it means that your credit rate does not have a fixed value and can be changedif the Euribor changes.
You can choose several deadlines, the most common of which are the six months or 12 months. This means that, for example, if you opt for the six-month Euribor, your credit rate will be magazine every six monthsso your monthly installment may increase or decrease.
But if you choose flat ratealready have one fixed value rate on your home loan. This value does not change until the end of the contract, does not vary or have revisions.
However, attention: when hiring a fixed rate, as a rule, you can count on a higher than the Euribor rate. It is a rate that offers greater predictability, but that increases your monthly payment.
With one mixed ratehas both sides of the coin: one fixed rate in an initial periodfor five, 10 or 15 years, whichever you choose, and after that period, a variable rate. That is, at first its rate will not fluctuate, but later it will be governed by the Euribor.
Also know that, if you want to repay capital or conclude the contract ahead of time, the commission for early repayment differs depending on the rate chosen. In variable rate, this commission is 0.5%and in a flat rate, commission is 2%.
Account must also be taken of the maximum term of home loan. Currently, customers up to 30 years old can only request a maximum contract term of 40 years; customers between 30 and 35 years, a maximum loan of up to 37 years, and customers over 35 years, a contract of up to 35 years.
Also read: With Euribor rising, should I opt for a mixed rate?
Life and multi-risk insurance
You still must know there’s two insurances associated with housing credit. When contracting this credit, the banking entities ask that they are also contracted life insurance and multi-risk insurance. Therefore, in addition to the monthly installment of the credit, you must also count on these two installments.
This is a way for banks to protect themselves in case something unexpected happens to customersand can receive the loan amount from the insurers.
regarding covers, O Life insurance can then cover death, life or mixed risk, along with supplementary coverage. as the diagnosis of serious diseases, Absolute and Definitive Disability (IAD) or Total and Permanent Disability (ITP). But what do IAD AND ITP coverages mean?
One IAD coverage covers a disability equivalent to 80%, resulting from illness or accident, which makes it impossible to work and requires assistance from third parties for vital needs (vegetative state). Is ITP coverage covers a disability of more than 60%, resulting from illness or accident that prevents work.
If it is necessary to activate this insurance, if one of these events occurs with the beneficiary of the contract, the insurer is responsible for paying the outstanding amount to the bank.
then the multi-risk insurance covers damages related to the property. These damages can result from: fires, explosions, lightning strikes and landslides, floods, problems with water pipes and sewers, and electrical hazards. It may also include the search for faults, civil liability of the insured and the household, and compensation for theft or robbery, including damage to doors and windows.
These multi-risk insurance coverages are the base options, but there are other complementary coverages that you can add. Such as: coverage of contents (goods inside the property), medical assistance at home, payment of accommodation expenses, replacement of television for 15 days free of charge, among others.
5. What future costs might there be?
After writing and acquired the propertymust be taken into account other costs.
If you bought the house in a building with condominiumhe can “inherit” debts of the previous owner, and still pays monthly duesas well as costs that may arise of painting the building, common repairs. There may also be a condominium insuranceif more than half of the fractions of the building are in agreement, so you may still have to worry about this installment.
In addition, you will have to worry about one more tax: the Municipal Property Tax (IMI). The value of the IMI depends on the value of the property and the location. There are situations in which you can also benefit from exemption of this tax.
Therefore, you must know the information relating to the property to find out if you are exempt or how much you can pay of this tax. For this, you can use the help of the Doctor Finance IMI Simulator.
Also read: Housing credit: Savings tips for the initial down payment