When you buy a house and borrow money for this, the mortgage will be part of this sum. The other parts are top loans and cash. Together, these three parts cover the entire cost of your home purchase. Here we will go through a bit more about what applies to the mortgage loan.
Bottom loan = Loan with collateral
The mortgage loan is by far the largest part of a mortgage and can extend up to a maximum of 85% of the purchase price of the home. A mortgage loan is a loan with collateral, which means that the home will stand as collateral for the loan – which in turn means that the home can be sold off and used to repay the lender if you are unable to pay your loan.
This means that the risk is much less for the lender to lend money in the form of mortgage loans. Since the bank / lender may demand that the home be sold to get their money back, the risk becomes much less for them. They do not have to worry about a complicated process where they may still not get their money back.
That you may be forced to sell your home to pay off the loan may sound a little negative, but it is not really so at all. A mortgage loan is the best form of loan you can have as the interest rate on this part is very low compared to other loans. Since the loan has the home as collateral, the lender does not have to take an equally large risk, which means that the interest rate is kept down.
How big can a mortgage loan be?
The proportion of the purchase that the mortgage loan represents can vary between different lenders, but the highest level is 85%. Since this figure may differ between different lending institutions, it is worth checking this out before you take out a loan – as it can actually be that a lender with a higher interest rate can be cheaper overall if they offer you a higher loan ratio (as it called).
It is interesting to know about the mortgage loan that you can get as much as 85 percent of either the price or the valuation. Quickly explained – if you were to buy your house for a lower amount than it is worth according to the valuation then you can borrow 85% of the price and then have not much left to pay.
If the price is higher and it therefore costs more than the valuation, you can, as most, only borrow 85 percent of the valuation. However, you have had to pay more than what the property is valued for, which means that you have more money left to pay that must come from either top loan or cash deposit. In other words (which is not particularly strange) it is better to buy a house for less money than it is actually worth!
Mortgage repayment period
Since a house can cost several millions and the mortgage loan can be up to 85% of this, the total loan amount is often very high. This means that it is not possible to repay the loan very quickly. The advantage of a mortgage loan is that you also do not have to worry about this, but you can even get an amortization period of up to 50 years if you wish. Important to remember is that the faster you repay the loan, the cheaper it will be overall.
Requirements to repay their mortgage
In 2014, there has been some debate about household indebtedness and the risks of having too high debt. One of the measures to address this problem was that it was proposed that people should be forced to repay more on their mortgages. It is true that many choose not to repay their loans at all.
The proposal is to repay loans that exceed 70% loan-to-value ratio. This means that you have to repay your mortgage at a decent rate until you reach 70%. After that you can slow down the amortization rate if you wish, but it is recommended that you continue to amortize. The usual thing is that you have to repay your loan for less than 70% in 10 years or less.
Not all banks have implemented these rules at the time of writing (March 2015), as they are still only a proposal on what will be implemented later in the year. However, some banks have already begun to revise their amortization requirements to adapt to the new rules. However, expect others to follow suit in the future.
Bonding time on the bottom loan
When you talk about the term of the mortgage loan, it is precisely the bottom loan you are thinking about. Bonding time is about the mortgage interest rate, where you can choose what is called variable interest (but which is really three months’ interest) or a longer binding period of up to 10 years with fixed interest. If you want to read more about this, please visit our article on mortgage term, where we will not go into this.