Everything you need to know about home loan rates: Interest represents the amount that borrowers must pay to the bank in exchange for obtaining a home loan. This interest can be expressed as a percentage of the borrowed capital.
In this case, we speak of “real estate loan rate”. The rate is a determining factor when a bank offers you a home loan. It is even the indicator that is looked at first by the borrower.
This rate varies depending on many parameters. What are they? Here’s everything you need to know to understand why mortgage rates fluctuate so much.
What is the interest rate on a home loan?
The interest rate on a home loan corresponds to the amount that the borrower owes to the lending organization in exchange for the service provided. Since the bank allows you to have an amount that you do not own, it has the right to “remuneration” for this specific service.
Interest represents the remuneration that the bank receives in exchange for the money lent… and the risk of default by the subscriber.
In reality, you must see the interest rate on a home loan as the remuneration required by the bank supporting you to deal with the risk of non-repayment that you represent. The more your profile is considered to be at risk, the higher the rate will be (which means higher remuneration from the bank). [Everything you need to know about home loan rates]
Fixed-rate or variable rate?
Today, the economic context of recovery through low rates no longer makes a variable rate loan attractive. Very low fixed rates are allocated by the banks. However, be wary of the “number of lines” of your credit.
The rate, even fixed, can be different depending on the period of your credit. For example, if you obtain a 15-year loan, the bank may grant a rate of 1.2% for the first 10 years and a rate of 1.5% for the remaining 5 years.
Read also: How to Get The Best Home Loan Rate?
APR or TEG?
The TEG is the loan rate recalculated after adding all additional costs
- application fees
- warranty costs
- insurance costs
- tax costs
- any commissions to intermediaries.
The APR, to compare bank offers
The TEG is calculated on an annual basis. This is why the TEG then becomes TAEG. The APR will be useful for comparing bank offers, which will include additional costs. This indicator being universal, its method of calculation is unique.
The default of the APR
The APR does not allow the calculation of certain terms provided for in the credits, such as:
- increase or decrease in monthly payments
- postponement of monthly payments
- prepayment penalties
It may therefore be interesting to supplement the APR with a comparison of the costs of the property loans offered by maturity and in the event of early repayment. [Everything you need to know about home loan rates]
What is TAEA?
Since the beginning of 2015, a bank that offers a home loan with an insurance proposal must mention the TAEA (effective annual insurance rate).
The banks also indicate the details of the guarantees. This may include death, disability, incapacity, or loss of employment guarantees.
The TAEA corresponds to the TEG including insurance minus the TEG excluding insurance. The TAEA allows the borrower to know the share of insurance in the cost of credit.
Why do mortgage interest rates fluctuate?
A lending organization applies a real estate interest rate based on the risk you present for non-repayment, but also on external parameters, not linked to your personal or professional situation.
What are these criteria? Here is a complete presentation of the criteria that increase or decrease the interest rates on real estate loans.
Your borrower profile
If you have little or no savings, are on a fixed-term or temporary contract, or if your income is low, you represent a greater risk. Conversely, having a significant contribution, being on a permanent contract, and with a good salary level allows you to benefit from a generally better rate. [Everything you need to know about home loan rates]
The bank’s commercial policy
A bank may need to “capture” new customers and will then want to offer low-interest rates to convince borrowers.
Conversely, a bank may have a fairly developed clientele or sufficient activity over a certain period, leading it not to make any effort to lower its real estate interest rates.
It must take into account operating costs and the margin (profit) that it wants to achieve. This commercial policy may vary from month to month (often from quarter to quarter).
The geographical location of the property
Real estate rates vary by region. This fluctuation on a local scale is linked to the organization of banking networks and commercial objectives which differ between establishments (as we have just seen).
- Some large networks have a common pricing policy throughout the country.
- Some banks are organized into regional banks, with rate setting carried out independently.
From one department to another, you can find very different rates within the same banking network. Is it possible to borrow from a neighboring department to benefit from a reduced rate? No, if you contact the nearest bank (this is the principle of territoriality). On the other hand, with a broker, you can deviate from this principle.
The duration of your loan
The longer your property loan is used, the higher the property interest rate will be. For what? Because of the long duration, the bank deprives itself of some liquidity over time (the interest it receives is spread over time), and the risk of repayment failure increases. This is why the rate is increased. [Everything you need to know about home loan rates]
Market conditions
If your borrower profile and the nature of your real estate project influence the rates, it is also the key rates set by the European Central Bank (ECB) that have a direct impact. This is the rate at which banks borrow from the ECB when they need financing.
The higher this rate is, the higher the final rate offered to borrowers will also be. The Euro Interbank Offered Rate (Euribor) and assimilable French Treasury bonds (OAT) also have an impact.
All the criteria that we have just listed – and which influence the real estate interest rate – are not always known. You cannot know the commercial policy of each bank. You also cannot have a view of the rates and their differences from one bank branch to another. How to conduct a comprehensive search and find the best conditions?
By using a broker like Monplomb.com which is in direct contact with several banking establishments. Much more than a simple intermediary, your broker knows the banks’ requirements, their pricing policies, and the efforts they can make for you.
Asking a professional for your real estate loan search is a guarantee of obtaining preferential conditions, by directly targeting the banks which can provide you with an attractive offer. Save time and get the best possible rate with a mortgage broker.
Read also: How to Renegotiate Your Home Loan With Your Bank?