When purchasing a permanent home, using mortgage loans, it is good practice to carry out simulation exercises for a home loan, from the various hypotheses that can be put forward. To break this path a little, let's simulate financing with some examples and analyze the impact on monthly installments.
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Permanent Home Loan Payable in 20 Years
We present three loan simulation hypotheses for permanent housing credit maintaining the credit duration and changing other variables.
Example 1 – Initial example of home loan simulation with 1,5% spread
Take out a loan at the Bank, for permanent own housing, in the amount of € 100.000.
We do not intend to finance the acquisition of other assets, so we maintain the value of the mortgage loan.
The nominal annual interest rate (TAN) will be determined by adding the index (usually the reference interest rate fixed by the Central Bank, the Euribor rate) to which the spread is added.
In the present case we consider the 6 month Euribor which we admit is fixed at -0,258%.
The spread depends on the assessment that the Banking Institution makes of the client, in terms of credit risk and the ratio between the value of mortgage loans and the value of the property assessed by the Bank. Let us assume that the spread is 1,5%.
Thus, the nominal annual interest rate (TAN) will be 1,5% - 0,258% = 1,242%.
Loan period 240 months (20 years).
We assume that we want a grace period of 6 months, in which we are not going to repay the loan but only pay the interest and, therefore, in this first phase, our effort is less and we can settle in the new permanent home in more peaceful way.
We will not use the possibility of capital deferral.
Let us admit that the initial loan charges for the house purchase, 750€, for property appraisal, analysis of the operation by the Banking Institution, preparation and execution of the deed of the purchase and sale contract and, also, of the mortgage.
We consider the monthly cost of the bank loan processing fee of €3.
We assume, for the credit simulation, that insurance premiums have an annual value of €250 (home life insurance and home multi-risk insurance).
Using the simulator available on the website of Portugal's bank we come to the following:
The monthly installments are €495,91, including all the costs of the mortgage loan, which are distributed as follows:
- Amortization of borrowed capital
- Interest payment
- Costs inherent in banking and taxes
The global effective annual rate (APR) includes not only the nominal interest rate (TAN) but also all other costs involved in the credit operation.
We will rehearse another simulation, admitting that it is possible to negotiate with the Bank, a more favorable spread, of 1%.
Example 2 – Simulation of a home loan with a 1,0% spread
NHS = 1,00% - 0,258% = 0,742%
Other assumptions equal to the previous example
The fact that the APR has decreased makes it possible to reduce interest and, consequently, the monthly installments, which are €473,16.
Returning to the TAN of 1,242%, let us now see the impact of choosing a Banking Institution, in which the amounts negotiated for the charges can be lower.
Example 3 – Loan simulation with different initial credit charges
Loan simulation in which the initial charges for home loans are € 500 and the monthly cost of the bank commission is € 2.
Monthly installments are € 494,87.
Simulate financing for a different period
Case 1 - 25-year period
Let's change the loan period from 240 to 300 months (25 years) and simulate financing with this assumption.
Once the simulation is done, we can analyze the result and compare it with our initial example, example 1 that we took as a reference.
The monthly installment goes from € 495,91 to € 412,81, because the repayment period has increased from 20 to 25 years. A reduction of € 83,1 (16,8%). But, "there is no beauty without it" and of course, as the loan period is longer, the total amount of interest payable, insurance and other costs also increases.
Next, we are going to simulate a loan, assuming that it is possible to negotiate a more favorable value for insurance with the Bank.
Case 2 - Credit for 25 years, with different insurance amounts
Home life insurance, 50 €
Multi-risk home insurance, 100 €
Total, € 150
We are admitting that the annual insurance values do not change and that they are €150. However, it is natural that your Bank may decrease this amount over time. If this is the case, use the amounts that the Bank gives you or consider an average annual amount, as we did.
Other assumptions are the same as the initial example.
Thus, the monthly installment goes from € 495,91 to € 404,48, a reduction of € 91,43 (495,91 - 404,48) or 18,4%. Comparing the credit simulation for the same period, the installment reduces from € 412,81 to € 404,48, minus € 8,33 (2%).
Case 3 – Simulate financing without a grace period
Next, we will simulate the financing, changing only the grace period, which does not exist.
The monthly installment is then € 403,55, slightly more than in the previous case, € 0,93 (€ 404,48 - € 403,55) but with the advantage of reducing interest and other charges.
There is no doubt that choosing the Bank and negotiating the conditions is fundamental.
Commissions, charges and insurance vary from Bank to Bank, and the main focus of the negotiation should be the spread and, with these factors negotiated, it can also consider the grace period and the amortization period.
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