In the personal finance, there are some basic concepts that should be known, especially so as not to have difficulties when, for example, hiring a mortgage. According to a recent ING study, 62% of Spaniards admit that it is difficult for them to understand the documentation related to the formalization of a mortgage loan. Concepts such as TIN and APR, Euribor, amortization, fixed or variable interest … can be a headache if they are not understood.
Only 17% of Spaniards consider that the documentation to contract financial products and services is simple. In addition, 23% admit that they have never faced this type of documentation, according to the survey carried out by the bank, which details that, among those Spaniards who have problems interpreting bank documentation, 25% admit that, although it arrives To understand it, you have to invest time and effort; and 19% feel that it does not always solve their doubts, especially when the information is related to contracting mortgages and insurance. For their part, 15% of Spaniards admit that they do not understand bank documentation in any case because they consider it not very accessible.
In order to help you discern the fine print, we’ve clarified some of the more common financial terms below.
TIN and APR
According to the ING survey, 55% admit not knowing what the TIN is, 29% admit not knowing what the APR is. Well, the TIN (nominal interest rate) is the price that the financial institution charges for lending or that it pays for depositing (in the case of deposits), while the APR (equivalent annual rate) includes, in addition to the TIN, the expenses and commissions associated with the products. As explained by the Bank of Spain, the APR allows you to compare different offers of loans or credits, regardless of their particular conditions.
It is the interest rate at which credit institutions are willing to lend funds in euros to each other and one of the reference rates on which depends what many households pay for their mortgage.
40% of those surveyed by the entity are not clear about what the Euribor is. In addition, according to an analysis carried out by Rastreator, 6 out of 10 young people aged 18 to 24 do not know what the Euribor is or what it affects.
This index became famous back in 2008, when it reached its all-time high (5.5%) and mortgages realized that their mortgage payments were skyrocketing. And it is that most of the variable mortgages in Spain are referenced to this indicator, whose value is added to the differential that the entities apply in variable rate loans. That is, if the spread is 1% and the Euribor is, for example, 3%, then the interest to be paid is 4%.
In addition, when it began to fall and many saw that its monthly letter did not vary due to having the so-called floor clause, which prevented them from benefiting from the falls in the Euribor, it became relevant again. The bank had to eliminate these clauses as abusive.
Mortgages subject to Euribor are generally reviewed annually (or semi-annually) and are updated up or down, depending on the status of the index at the time of the review. The bank will calculate the new monthly fee based on the latest Euribor published in the Bank of Spain in the BOE. Now, the 12-month Euribor stands at historical lows close to -0.5% and benefits mortgages.
Fixed and variable rate
Variable interest rate mortgages fluctuate depending on the evolution of the index to which they are referenced, mainly the Euribor. Thus, the interest payable is the result of the sum of the index and a constant percentage, known as the differential. According to the Bank of Spain, “downward limits may not be established and the interest on the loan may not be negative.” One of the advantages is that the initial interest rate is usually lower than that of fixed-rate mortgages and the option of longer repayment terms is usually offered, usually between 20 and 30 years or even more. Among the disadvantages, a higher fee is paid if interest goes up, although it is the opposite if it goes down.
In fixed-rate mortgages the interest is stable and the monthly payment to be paid remains fixed throughout the life of the loan. Its good side is that you know in advance how much you pay each month, without worrying about the rise or fall of rates, which gives stability and peace of mind. In addition, in recent years, fixed rates have fallen to unprecedented levels (2.72% on average, according to Statistics) and are already very close to variable prices (2.19%), although they are still above. Thus, and with the current Euribor in negative and at a minimum, whoever hires a fixed mortgage will pay more than with the variable, at least until the Euribor rises, something that is not expected in the short term.
Amortizing is paying off the loan debt to return the initial money, plus interest, to the lender. It can be made in a single payment, that is, once the agreed return period has ended, or periodically in installments. In mortgages, entities normally apply the French amortization system, which implies paying more interest at the beginning and less principal and less interest at the end. Its advantage is that you know what you are going to pay in each period (in case the interest does not vary) and its disadvantage is that the principal of the loan does not begin to pay off until the final part of the loan.
Loan To Value
When you ask for a mortgage, you usually have to have money saved (around 20% of the price of the house plus another 10% for expenses) since, in general, financial institutions only finance 80% of the purchase price or appraisal. That is the financing amount or Loan To Value. Thus, for example, for the purchase of a house of 150,000 euros, if the entity offers an LTV of 80%, it means that it is willing to lend 120,000 euros to finance its acquisition. The rest, up to 150,000 euros, should be provided by the client.
“The problem that exists many times with this deficit in financial education is that it makes the user end up paying more than what they owed and even make the wrong decisions that can later have a negative impact on the future and their savings. For this reason, betting on greater financial education from an early age will help to improve and solve this problem ”, explains Sergio Carbajal, head of mortgages at Rastreator.