How to Choose a Home Loan That Fits Your Financial Needs

By Swindon Link - 18 July 2022

Home and Garden

 

As bank interest rates have dropped in the past 10 years in Europe, more and more people have been able to take out loans to achieve the dream of homeownership.

 

At the same time, banks have added new mortgage types and tweaked requirements for issuing loans, particularly for first-time home buyers and non-resident buyers.

 

All of which might have you thinking it’s the right time for you to take the leap and buy a home yourself. But given the various options, it can get tricky if you don’t know how to choose a home loan that works for you and your wallet. The entire process can be daunting, especially if it's the first time you’ve ever borrowed that much money.

 

Let’s take a look at what you need to understand about home loans and their terms to help you make a wise decision.

Determine Your Budget

Whether you make thousands or millions, step one in figuring out what loan is right for you is to figure out what you can afford. This includes understanding not just what your monthly payments would be, but also whether you have enough cash on hand for the deposit and purchasing fees.

A home loan calculator can be a good place to start. It can give you a rough idea of what your payments would be and how that number changes with a change in the interest rate or deposit.

Running these numbers first helps you make decisions about the next steps to take. You might decide it would be better to wait to purchase until you can save up for a bigger deposit. That not only provides you with a better cushion against an economic downturn but also lowers your monthly payment and reduces your overall debt load.

Don’t forget to include the various fees you’ll have before you sign a contract since that will impact the amount of cash you’ll need to have on hand before you make an offer and apply for the loan.

You’ll also have better parameters to help you in your house hunt since you’ll know how big a mortgage you can afford.

While the calculator is a good place to start, you can also go to the bank to discuss with them a potential loan. They should be able to give you a firmer idea of how much you can borrow and the terms they might offer.

Know Your Loan Terms

Mortgage terms can vary from bank to bank, and all have a bearing on your mortgage payment and whether a particular package is right for you.

The terms the bank offers depend on your income, other debt, and the length of the loan. Most people taking out a mortgage get a classic home loan, which is a specific amount loaned over a specific period paid back with interest. It’s important to understand how each of those can impact your monthly payment.

Lending Period

The longer the lending period, the lower your monthly payment will be since the amount is divided over more months. It varies based on the country you’re in and how flexible the bank is.

For example, the standard in the UK is 25 years, but it is possible to get a loan for as short as 15 years or as long as 35 years. In Malta, first-time buyers can get a loan for up to 40 years, while non-first-time buyers have to pay their loans back within 25 years.

Check your loan terms to see if you can do an early repayment or if there are fees for doing so

Deposit Required

Your contribution or deposit toward the house price reduces the amount you borrow. You should plan to have some money to put down on the house as banks are unlikely to loan you 100 per cent of the purchase price.

Some countries have minimum and maximum amounts the bank can require. Higher-risk loans require a higher deposit of as much as 30 per cent, while lower-risk loans might only require 10 per cent. The deposit can also vary if the house is being purchased as a second residence.

Interest Rate

Loans come in two flavours of interest rate — variable and fixed. Variable rate is a common choice for European buyers and is calculated as a fixed amount above the bank’s base rate. That means your payment amount can change over time if the bank changes that margin or its base rate.

Fixed interest rates set a single rate that stays the same for a set time. When that passes, you can switch to a variable rate loan or renew the fixed rate.

Regardless of which type you choose, you should calculate the APRC or annual percentage rate of charge when comparing loans. That number gives you a better picture of your interest costs over the lending period.

Shop For Lenders

Because one requirement for getting a loan is to have a bank account, it’s standard to start your mortgage shopping with your current bank. But the overall package of the deposit amount, interest rate, and loan length can vary from bank to bank, so it’s good to shop around.

Even if you talked to a bank before you started house hunting, there’s always a chance you can be denied the loan once you have a house picked out. One bank could consider you high risk if you’re a non-resident, while another could consider you low risk because they don’t take that into account.

How To Choose a Home Loan

Before you start looking for the home of your dreams, it’s a good idea to review your financial situation and whether you qualify for an affordable mortgage from a bank. Understanding the different home loan types gives you a solid basis for how to choose a mortgage as well. From there, you can talk to and compare lenders and the packages they offer to ensure you get the right deal for you.

 
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