Mortgage loan

Buying a home often means taking on a large amount of debt. Being well-informed and cautious can help you take this step more confidently. Let's look at how a mortgage loan works and how you can choose the one that best suits your needs.

What is a mortgage loan?

A mortgage loan is a type of credit that helps you buy, build or renovate a property – often your main home. It is the most common form of home financing available to consumers. The bank provides the loan amount in a single payment, and you pay it back over time - with interest - through regular instalments based on an amortization schedule. These instalments may be monthly, quarterly, half-yearly or even annual, and the repayment period usually ranges from 5 to 30 years.

Why is it called a mortgage loan? Typically, the bank requires the property as a lien for the loan by registering a mortgage - a legal right that allows the bank to sell the property if you stop making your payments. To determine the value of the property, the bank appoints an independent expert - known as a valuer - who specialises in property valuation.

Usually, the funds from the mortgage are released a few days after signing the loan agreement, once the bank is certain that the mortgage on the property is legally effective.

What to do before applying for a mortgage

A mortgage is a long-term commitment. Before applying, think carefully about whether you'll be able to manage the repayments over time, considering your income and expenses.

Planning your finances is essential to work out whether the monthly payment is affordable. Try to estimate the maximum instalment you can realistically manage. Once you've taken out the mortgage, good financial planning will also help you set aside the money you need for each repayment.

As a general rule, your monthly mortgage payment should not exceed one third of your disposable income. When calculating your income, don't include occasional or unpredictable earnings, such as overtime. The bank will give you a document called Information Sheet, which includes general information about the mortgage. This will help you check how long it may take to receive the loan and whether that timing fits in with your home purchase plans (for example, make sure the loan is approved and the necessary steps are completed before setting the date with the notary for signing the sale contract).

Once you've reviewed your income and expenses, it's time to think about the loan amount (how much you can borrow), the loan term, and the type of interest rate - fixed or variable. Let's start with the amount.

How much can you borrow?

Banks typically lend up to 80 per cent of the property's valuation. This means you'll usually need to have saved up the remaining amount - at least 20 per cent - in order to buy the property. Some banks may be willing to lend more than 80 per cent (even up to 100 per cent of the valuation), but usually only if you provide additional guarantees, and the terms may be less favourable.

The valuation of the property is not the only factor that determines how much you can borrow. The bank will also consider other aspects, such as your ability to repay (your creditworthiness), your age, whether there are other applicants involved (who would share responsibility for the mortgage payments), and whether there are guarantors – people who agree to repay the loan if you're no longer able to.

Depending on your personal situation and the criteria used by the specific bank or financial intermediary, the conditions you're offered may vary. For this reason, it's always a good idea to compare several offers – from your own bank, PosteItaliane, or other financial intermediaries.

Loan term and interest rate type

Now let's look at the loan term and the kind of interest.

The loan term is one of the most important aspects of a mortgage agreement. A mortgage is, by its nature, a medium-to-long-term loan. As we've mentioned, lenders usually offer terms ranging from 5 to 30 years. Agree on the term with your bank based on several factors: your age, the amount you're borrowing, and the instalment you can afford to pay.

The main cost of a mortgage comes from interest - the amount you pay the bank or financial intermediary in return for borrowing the money. Interest and loan duration are closely connected: if the loan amount and type of interest rate stay the same, a longer repayment period means you'll pay more in interest overall, even if the individual instalments are lower.

You can choose from fixed-rate mortgage, variable-rate mortgage and mixed-rate mortgage.

• With a fixed-rate mortgage, the interest rate stays the same for the entire loan term. Your monthly payments won't change. This is a good choice if you want certainty about how much you'll pay each month and the total amount you'll repay. The downside is that you won't benefit from any decrease in market interest rates overtime. Besides, fixed-rate mortgages may come with higher initial costs compared to variable-rate ones.
• With a variable-rate mortgage, the interest rate is made up of two parts:
1. a reference rate, stated in your contract – for example, the EURIBOR;
2. a fixed margin (the bank's profit), which remains the same throughout the loan.The EURIBOR is influenced by the European Central Bank. If this rate goes up, your mortgage becomes more expensive. If it falls, you'll pay less.
• A mixed-rate mortgage combines elements of both fixed and variable rates. For example, your contract might allow you to switch from a fixed rate to a variable one (or vice versa) at set intervals – such as every five years. The advantages and disadvantages vary over time, depending on which rate is active.

A special type is the dual-rate mortgage, where part of the interest is calculated using a fixed rate and part using a variable rate.

Un caso particolare è il mutuo a tasso doppio: gli interessi sono calcolati in parte in base a un tasso fisso e in parte con un tasso variabile.

You may be wondering: which interest rate is better for me? Unfortunately, there's no way to know for sure in advance. No one can predict how the official rates set by the European Central Bank will change – and these have a direct impact on the fixed and variable rates that banks offer. In any case, only choose a variable rate if you've planned your finances carefully and could cope with possible increases in your monthly payments – even significant ones. If your repayments are already close to your budget limit, you could face serious difficulties if interest rates go up.

Mortgage costs and how to compare them

Interest is the main cost of a mortgage, but it's not the only one. You may also have to pay other charges, which are listed in the European Standardised Information Sheet. Remember to factor in additional costs for the property valuation, the notary, and registering the mortgage. There may also be extra charges in specific situations - for example, late payment interest if you miss an instalment, or the cost of an insurance policy if the bank requires one.

Note that a tax will be applied, based on the total loan amount and depending on whether the property is your main residence. The tax is collected directly by the bank.

To understand the cost of a mortgage offer, look at the information documents the bank must provide before you sign the contract. These are available both online and at the bank counter. One key figure to check is the Annual Percentage Rate of Charge (APR – in Italian Tasso annuo effettivo globale, TAEG) - shown on the pre-contractual information sheet.

If the bank tailors the loan to your financial situation and preferences, they must give you the European Standardised Information Sheet (ESIS), free of charge. This document clearly outlines the terms and features of the proposed mortgage. All banks use the same format, so you can easily compare different offers. The ESIS must be provided in good time before you sign the credit agreement or commit to an offer.

If you're in a position to repay your mortgage early - either in full or in part - you can usually do so without paying any penalty.

Risks

Even if you've planned carefully and chosen a mortgage that fits your life standard, unexpected events can make it hard to keep up with repayments.

If you fall behind, the bank will inform you of the consequences and may apply default interest for the late payments. In more serious cases, the bank can terminate the mortgage agreement. If you're unable to repay the debt, the bank can request the repossession and sale of your home at auction. However, banks don't usually benefit from repossession - selling a property at auction takes time and often returns less money. If you're struggling, contact the bank straight away. It's in both your interests to work together to find a solution.

The bank must report missed payments to credit reference agencies such as the Central Credit Register. This can negatively affect your credit record, making it harder to get future loans.

Transferring your mortgage

If you already have a mortgage and find a better deal - for example, due to lower interest rates - you can switch lenders without paying any fees or penalties, and without needing permission from your current bank. By law, both closing your existing mortgage and opening a new one must be free of charge. The new bank will repay your outstanding debt to the old bank, and you'll keep the existing mortgage charge on your home. You'll then continue repaying the remaining balance under the terms agreed with the new bank.