Interest rates on real estate mortgages
The financing sector is characterized by a technical language which can sometimes be difficult for non-professionals to understand. Here then appear in the varied panorama of home loans concepts such as “spread”, “loan to value”, TAN and APR, as well as expressions such as “amortization plan” or “guarantee guarantee”, in front of which you can feel bewildered if you don’t have enough skills to find your way.
The fixed, variable and mixed interest rate
In order to correctly interpret the mortgage proposals, it is necessary to first evaluate their actual convenience. Each loan has costs, and it is precisely by comparing these elements that the most advantageous offers can be identified.
When we talk about mortgages for the purchase or renovation of a home, we always refer to the annual nominal interest rate (TAN), which can be fixed, variable or mixed. This is the percentage that will be calculated on the basis of the capital received and which will increase the amount of the periodic installments to be paid.
The fixed rate is constant for the entire duration of the loan, while the variable rate can change depending on the trend of the loan market. In this case, the value to refer to is that of Euribor, the indicator that governs interbank lending. Finally, fixed rate mortgages provide for the transition from a fixed to a variable one (or vice versa) during the loan term.
Advantages and disadvantages
Each solution illustrated above has advantages and disadvantages. By choosing a convenient fixed rate mortgage, for example, you can avoid any future increases, thus making a forward-looking choice. Those who prefer the floating rate, will be able to access even lower and therefore more convenient percentages, however, going towards a risk of future increase of the same, a danger that becomes more concrete in case of long-term amortization plans.
However, it should be noted that the variable rates proposed at the moment are particularly attractive, as the Euribor is even negative, a factor that in some cases allows you to take advantage of rates lower than 2%. In the search for a variable rate mortgage, you can also come across variable rates with cap, a proposal that combines low percentages with the guarantee that the costs cannot exceed a threshold proposed by the lender.
The spread (which in Italian we can define as “margin”) is an additional percentage that adds to the TAN in defining the interest rate.
The lender, which in turn receives the capital for the loan against a cost, can be defined as a rate to benefit: by applying the spread, the credit institutions will thus be able to cover the management costs, also earning amounts. The spread associated with the Euribor generates the TAN for variable rate mortgages, while for fixed ones the percentage is given by the spread added to the IRS.
The TAN and spread are not the only factors that need to be taken into consideration when calculating the costs of a mortgage. These may in fact include additional expenses, such as the fees for the preliminary and appraisal activities, the stamp duty fees and the possible insurance costs (if the policy is mandatory).
All these items add up to the costs defined by the TAN and the spread, and can be expressed with an additional percentage index, called APR. This abbreviation, acronym for Global Effective Annual Rate, defines the expenditure associated with each mortgage in a more exhaustive way, and allows the applicant to calculate in a more transparent and complete way the amount of the monthly installments to be paid during the amortization plan.
In evaluating the convenience of mortgages, it will be useful to compare the various proposals to choose the solution that best suits your needs.