How to negotiate a mortgage

We'll explain the key aspects you should understand before you negotiate a mortgage loan contract
There are many variables that contribute to the terms of a mortgage loan, and although banks offer ‘set’ mortgages with some fixed terms and conditions, there is usually some room for maneuvering that will allow a loan applicant to modify certain aspects. This means that negotiating a mortgage can be a three-phase process. The first phase will be gathering information, the second will be establishing your objectives, and the third will be the actual negotiations with the bank.
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Phase 1: gathering information

There are dozens of financial institutions in Spain, and each of these in turn offers a variety of mortgage loans with different terms and conditions. The offers existing on the mortgage market are very diverse, and if you are planning to apply for a mortgage or improve upon the terms of the one you already have, you are likely to find a wide range of options available. But what should you focus on when gathering the information you need?

  • Interest rates. The amount of interest you will pay on your loan is the most important aspect to take into account. Remember that if you have a variable-rate mortgage the amount of interest you will pay, and therefore also the cost of your monthly installments, will depend upon the Euribor as well as on the fixed margin applied by the bank. The interest rate is typically expressed as: Euribor + 1%. Each bank also specifies the cost of its mortgages using the NIR (Nominal Interest Rate) and the APR (Annual Percentage Rate). These are both ways of expressing the cost of the mortgage, although if you want to make a comparison between two institutions you should focus on the APR, since this includes the various fees and other costs associated with the mortgage.
  • Fees. All banks charge fees associated with their mortgage loans, but they do not all charge the same types or amounts. The most common types of fees are:
    • For opening. This fee is charged when the mortgage loan is first established, to cover the procedures required for its formalization and for making the money being loaned available.
    • For modification. A mortgage modification means changing the terms and conditions of a mortgage loan that has already been contracted, which will involve some specific administrative procedures and associated costs.
    • For switching lenders. This process requires a series of administrative procedures that will always result in extra costs, and some banks charge a fee for this as well.
    • For full or partial repayment. If you decide to pay back all or some of the outstanding amount of your mortgage loan early, the bank that financed the operation will no longer receive its compensation for interest on the remaining amount of the loan during the period of time remaining until the end of the contract. This fee represents an effort by the bank to obtain compensation for this lost income, although not all banks will charge it. Unless a different percentage has been agreed upon with the bank, the fee for early repayment within the first 5 years of the life of the mortgage is 0.5%. However, if this early repayment takes place more than 5 years into the life of the mortgage, the percentage is 0.25%. These percentages are applicable only for mortgages contracted in December 2007 or thereafter.
    • For compensation for interest rate risk. This fee is charged as compensation for early repayment of variable-rate mortgages with a revision period of more than 12 months, and for other mortgages when the market interest rate at the time of the repayment is below the interest rate of the fixed-rate mortgage contract, which causes a loss for the bank. This cost tends to range from 1% to 5% of the outstanding amount of the loan.

When searching for your ideal mortgage, some research on the Internet can be a good first step. There are numerous websites with information from banks, as well as online mortgage comparisons. There are also specialized publications that can help clarify any uncertainties you may have, and which act as a complement to the websites of the banks themselves.

Phase 2: establish your objectives

Once you have all of this information in hand, it is then time to decide what you want to accomplish when negotiating your mortgage. Knowing what the various banks are offering can help you plan out some realistic objectives that will be very useful when it comes time to negotiate.

Perhaps you want to obtain some better initial terms and conditions, such as a lower interest rate, or if you have already contracted a mortgage, perhaps you have seen more favorable terms at another bank and want to negotiate with your existing bank to update your contract.

If you are going to negotiate the contract of a new mortgage, you must first establish:

  • How much financing you need.
  • How long you want your repayment period to be.
  • What interest rate you are willing to pay.
  • What associated products you want to contract.  

From there you can define your own objectives, and then focus on them when you sit down to negotiate. It is recommended that the monthly installments you will be paying for your mortgage should not exceed 35% of your disposable income.

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Phase 3: negotiate based upon your needs

You can try to negotiate most of the terms and conditions that will affect your mortgage, in order to ensure that they fit your needs. The first of these terms, the fixed margin used to calculate the interest rate, is one of most important. Of course, the Euribor is beyond your control and will always be the unknown factor in a variable-interest mortgage. However, you can always try to negotiate the margin, since a small change in this element can make a big difference.

Another key factor is the repayment period for your mortgage. A longer repayment period implies lower monthly installments, but at the same time it will increase the overall cost of the mortgage loan. On the other hand, a shorter repayment period will result in higher monthly installments, but the final overall cost of the loan will be lower.

Finally, the various fees that are typically charged for a mortgage can also be negotiated, and these are some of the terms and conditions that you may be able to improve upon when it comes time to sign your mortgage contract. Interest, repayment period, and fees are all aspects where the customer should try to work together with the bank to arrive at a fair deal.

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