Common Mortgage Lending Practices

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Obtaining financing to take advantage of one of the best moments in recent history for acquiring real estate has become one of the biggest hurdles for potential buyers to overcome. While only two years ago lending practices were at their most lenient, the sudden turnaround has been dramatic.

More so than ever before have personal credit ratings been such a prominent deciding factor of banks and lending societies. Screening potential clients to avoid future problems with repayments has lead to one of the most difficult moments to obtain financing.

While it is arguable that improved access to financing will assist in balancing the excessive falls in real estate purchases, it is expected to be only a matter of time before restrictions on lending practices ease. Many buyers are keen to access the current market to take advantage of the exceptional property prices available, yet are held back due to limited access to lending and long term employment security.

Prior to applying for a mortgage, increasing numbers of buyers are arranging pre-qualification. This often involves visiting a variety of financial providers to seek the most suitable terms and conditions, then assessing the amount the applicant would be permitted to borrow after discussing their personal financial situation.

A pre-qualification can be beneficial to buyers to understand their maximum budget when searching for a property. It can also speed up the process of purchasing a property in high demand, or to enable a preference against other potential buyers, as the owner will be aware that you have the ability to purchase without delay.

Fixed Rate Mortgages

Generally a fixed rate mortgage will maintain the same interest rate throughout the term of the loan. Protecting the loan from fluctuations in the interest rates, the benefits of fixed rate loans are maximised when obtained during moments of low overall interest rates. If opting for a fixed rate loan when interest rates are high will ensure higher than average payments throughout the loan. This type of loan provides security to the borrower as they are not affected by fluctuations in the market.

Variable Rate Mortgages

Variable rate mortgages, also known as floating rates and adjustable rate mortgages, are based on fluctuations in the market. When interest rates are low, the mortgage repayments will also go down, yet when the market turns around and interest rates increase, so do the repayments. Banks are more inclined to offer clients variable rate mortgages as increased gains can be obtained from clients during the course of the loan. To protect clients from unexpected excessive increases in the interest rates, a ceiling or cap is often placed on the maximum rate limitations.

These fluctuations are based on market indicators which vary between regions. Indicators such as the Euribor are calculated on average overall rates of European banks, providing a base for mortgage interest rates. While the Euribor will fluctuate daily, the variable mortgage will be re-calculated over a specific period of time, such as annually or bi-annually, depending on the individual provider.

General Considerations for all Mortgages

Keeping in mind that the interest rates, terms and conditions will vary between lenders, shopping around for the most suitable option fitting individual requirements is highly advisable. Annual overall costs of loans can be compared from the Annual Percentage Rates (APR) which is calculated from all the associated costs of the mortgage.

Consulting the early repayment penalties is advisable when considering the term of the loan to be obtained. Early repayment penalties are often applied to clients that pay off their loan prior to the pre-arranged termination date, with the imposed penalties can vary between lenders. This is often the case when a property is sold and the mortgage is paid off in one lump sum, or when a loan offering improved conditions is obtained from a different lender, cancelling the existing loan.

Additional associated costs will also need to be taken into consideration when arranging a mortgage and are often one-off payments. Account set up fees, currency exchange and transfer fees can apply if opening a new account in a foreign country for the purchase of overseas real estate. A property valuation by the financial provider is likely to be required to calculate either the amount to be borrowed, or to ensure the property is worth the amount of the loan being requested. Mortgage arrangements fees for the set up of the loan are also likely to be charged.

Prior to searching for a mortgage provider, it is ideal to take into account all of the additional extras that are likely to be charged. This will further assist with comprehending the full extent of the initial charges, along with ongoing long-term expenses when opting for a suitable finance provider.

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