A mortgage involves a number of different fees and commissions, the sum of which may “shock” some. Although theoretically one of the cheapest forms of money lending, its total cost is often high. Does it always have to be this way? Where and how to save with a loan for an apartment? In today’s article I will try to show you what to look for when planning a mortgage, and how to live comfortably with it later.
When choosing a mortgage offer, attention should be paid to many elements: the purpose of the loan, the amount of own contribution, creditworthiness, etc. Theoretically, this information should be enough for us to choose the best mortgage in the current market situation.
Just what will you do after granting the loan? Do you have to pay back your loan and pay it back to the bank? Nothing similar – just a little knowledge of economics and the basics of mathematics, and the cost of credit can be reduced by half.
I will show you some practical and proven tips that will help you save money and allow yourself to relax while paying the loan. Maybe you will go on your dream trip?
Savings and expenses plan
For today’s experiment we will need an example of the “Powalskie” family. Let’s assume that they have recently finished education, have been working full-time for two years and plan to buy their first “M”. Due to their age and seniority, they don’t have much savings. They have only saved $ 62,000, which is largely from their parents. The Powalskie family intend to buy a ready flat from the developer for $ 350,000 and choose $ 60,000 to finish it. The cost of the entire investment will amount to $ 410,000. So they went to several banks and credit experts, read entries on mortgage forums, and then selected a few of the best mortgage offers for themselves.
They also made a spending plan:
- The Powalskie intend to allocate $ 50,000 for their own contribution.
- Notary fees related to the transfer of ownership will amount to $ 3,000.
- The remaining amount of $ 9000 was reserved for bank charges.
The Powalskie family already know that the best mortgage offers start with a 20% own contribution, and their savings allow a maximum investment of 12.2%. Therefore, they have basic loan offers.
Choosing a loan – basic criteria
Let’s assume that the Powalskie have received positive credit decisions in all three banks and must decide to sign a contract with one of them. At this point the fun begins, of course we can make a table with the pros and cons of each loan offer, i.e. we compare which bank has:
- lowest initial costs (commission, real estate valuation insurance);
- lowest installment (remember that the bank may add insurance to the installment);
- lowest loan margin;
- lowest total loan cost;
- and so on….
A lot of variables, but most of us will pay attention mainly to three elements: commission for granting the loan, installment amount and total cost. As a result, we will limit ourselves to the bank’s proposal No. 1 or 2. No wonder, the difference in total cost between proposal No. 2 and 3 is as much as $ 43,656.00, and we will somehow swallow the commission of $ 6,840.00.
Let’s compare a loan for an apartment with the purchase of a new car. When buying a new car, do you intend to drive it for the next 30 years? Of course not! In a few years you will change them to a larger, more economical one or you will fulfill your dream and buy a convertible. A mortgage is like a car that needs to be changed over time. For what? For savings that will allow other plans to be implemented.
Now I will show you how to save on mortgage at a low cost.
LTV and credit transfer
Please note the lack of commission for granting loan for offer no. 3. In such a situation, instead of paying commission to bank no. 2 a commission for granting a loan in the amount of $ 6,840.00, increase your own contribution in the bank’s proposal no. 3, reducing the loan amount to $ 253,160 . By reducing the loan amount, right from the start you reduce the total cost of bank No. 3 to $ 282 833.00. Bravo! However, even this procedure did not significantly improve the competitiveness of this offer.
Another very important element is the ratio of the loan granted to the value of the property (so-called LTV). In the case of bank No. 1 and 2 proposals, LTV is 87.8%, while in the case of bank No. 3 proposal, the ratio was 86.13%. After meetings with bank employees and financial agents, you know that the best offers start with a 20% own contribution. So why not transfer your loan to another bank when your loan balance reaches 80% of the property value?
Under ideal conditions of unchanged real estate prices and without making any additional loan overpayments, you will reach 80% LTV of the loan taken out in bank No. 1 and 2 in the 53rd or 52th month of repayment. It looks different in the case of the bank’s proposal No. 3. Due to the higher own contribution, you will reach this level already in the 45th month of the loan.
When you reach 80% LTV, you can try to change the old unfavorable loan to a new one with much better parameters. The procedure for such a change is the same as for taking a loan to buy a property, with the difference that the purpose of the loan is to repay the old “rusty” loan completely.
How much will the savings amount to?
Please note that at the very beginning I pointed out that by choosing the offer of bank No. 2, you would pay about $ 244 543.00 for the loan. Now I have shown how with a little willingness and time you can beat this offer and save about $ 27,302.55.
You can repeat this operation not only when the LTV ratio changes, but also when the price lists of mortgage products change. Remember that during a period of interest rate increases, banks must encourage new buyers to take out mortgages. Such motivation is to be reduced margins, which are one of the most important elements of the cost of credit. That is why it is so important to review our loan agreements and check whether new, much better loan proposals have appeared on the market.
Loan overpayments and additional savings
Let’s assume that the household budget began to allow for a small overpayment of the mortgage. You do not know, however, whether such small overpayments of $ 15,000 a year will change something on your loan. Well, I calculated how systematic overpayments of $ 15,000 starting from the 12th month would reduce the total cost, taking into account the option of shortening the loan period with partial repayment of the loan.
To sum up, at the very beginning we took out a $ 360,000 mortgage with a 30-year loan period. We were supposed to give an additional $ 244 543.00 to the bank. By using a bit of time (to transfer the loan) and a bit of self-denial (especially in saving for overpayments), we were able to reduce the repayment period by half (45 months repayment of the first loan and 136 months repayment of the second loan, taking into account systematic overpayments). We have reduced the total cost to $ 137,897.85. The amount of savings generated in this way reached the value of $ 1064.615!
Of course, the presented situation does not take into account many variables, i.e. changes in property prices, interest rates, bank offers, which can also be used to generate savings. However, I wanted to show that you can always save on a mortgage, and all you need is good intentions.