Definitive Guide to Your First Mortgage
Introduction
Buying a home is often one of life’s most significant projects. Securing a mortgage, especially your first one, can raise many doubts and concerns: which bank offers the best interest rate? What are the associated costs? How do you negotiate to avoid overpaying? This guide provides everything you need to know before taking the plunge into your first mortgage. From basic concepts to negotiation tips, our goal is to help you make the best possible financial decision.
1. Understanding What a Mortgage Is
A mortgage is a long-term loan granted to finance the purchase of a property (or occasionally a commercial space), with the property itself serving as collateral. This means that if the borrower fails to make payments, the bank can seize (foreclose on) the property. In return, the bank charges interest (fixed, variable, or mixed) over the agreed term.
Typical Duration: 15 to 30 years, though some mortgages may be shorter or slightly longer.
Amount: Generally covers up to 80% of the appraised value of the property (or less), although some lenders may offer a higher percentage under specific conditions.
2. Types of Mortgages
Choosing the right mortgage type can save you thousands of euros over the life of the loan.
Fixed-Rate Mortgage
The interest rate remains the same throughout the life of the loan.
You have a stable, predictable monthly payment.
On the downside, the initial monthly payment is usually higher than with variable-rate mortgages when interest rates are low.
Variable-Rate Mortgage
The interest rate is tied to a reference index (such as the Euribor) plus a margin.
Monthly payments can go up or down depending on interest rate fluctuations.
The initial payment can often be lower, but there’s a greater risk of costs increasing over time.
Mixed Mortgage
Combines an initial fixed-rate period (5–10 years) with a subsequent variable rate.
May be appealing if you want stability in the early years and are willing to take on risk later.
Example Comparison: Fixed-Rate vs. Variable-Rate Mortgage
To illustrate the cost differences between a fixed-rate and a variable-rate mortgage, let’s consider a simple example. Suppose:
Mortgage Amount: €150,000
Term: 25 years (300 monthly payments)
1) Fixed-Rate Mortgage
Fixed Interest Rate: 3.5% annually (hypothetical, reflecting a relatively stable current offer).
Monthly Payment: ~ €752
This payment stays the same for the entire term.
Total Interest (approx.): ~ €75,600 over 25 years
By the end, you’ll have paid €150,000 in principal + €75,600 in interest.
Advantage:
You’re protected from changes in the Euribor—your monthly payment won’t change.Disadvantage:
If the Euribor drops significantly, you won’t benefit from lower rates.
2) Variable-Rate Mortgage
Current Euribor (example): ~ 3%
Margin: + 0.5%
Initial Interest Rate: ~ 3.5% (similar to the fixed-rate example).
The big difference is that the Euribor changes over time. To estimate its evolution, one could look at its average over the last 30 years, which has ranged roughly between 2% and 5.5%.
2.1) “Low” Euribor Scenario: 2%
Resulting Interest Rate: 2% + 0.5% = 2.5%
Approx. Monthly Payment: €673
Total Interest Cost (if 2.5% were fixed throughout the term, which is hypothetical): ~ €52,000
Here, the payment is lower than with the fixed-rate mortgage.
2.2) “High” Euribor Scenario: 5%
Resulting Interest Rate: 5% + 0.5% = 5.5%
Approx. Monthly Payment: €921
Total Interest Cost (if 5.5% stayed fixed for the entire term, which is unlikely but illustrative): ~ €127,000
Note how interest costs skyrocket.
Advantage:
In periods of low Euribor, your monthly payment goes down, potentially saving you thousands of euros.Disadvantage:
If the Euribor rises significantly (as in an economic upswing), your monthly payments can increase sharply.
Example Conclusion
Fixed Rate (3.5% constant): You pay about €752 per month, totaling ~ €75,600 in interest.
Variable Rate: You may initially pay something similar, but if the Euribor drops to 2%, your monthly payment could dip to around €673, saving over €100 a month compared to the fixed option. However, if the Euribor climbs to 5% (or higher), the payment could approach €900–€1,000, greatly raising your borrowing costs.
This example shows why choosing a fixed or variable rate depends on your risk tolerance, repayment capacity, and interest-rate outlook. If you prefer stability and greater certainty, a fixed-rate mortgage may be best. If you anticipate cycles of low interest rates and are willing to handle possible increases later, a variable-rate mortgage could save you money over time.
3. Steps to Take Before Applying for a Mortgage
Before going to the bank, consider the following:
Review Your Financial Situation
Analyze your monthly income and expenses.
Check if you have other debts (personal loans, credit cards).
Ideally, your mortgage payment should not exceed 30–35% of your net income.
Savings and Up-Front Costs
Besides the monthly payment, you’ll need funds for appraisal, notary fees, administrative services, and taxes (IAJD in Spain).
Remember, banks typically don’t finance 100% of a property’s value.
Bank Score and Documentation
A clean and stable credit history boosts your chances of securing better terms.
Prepare pay slips, tax returns, and employment contracts.
If you have a stable work situation (permanent contract), lenders tend to offer better deals.
4. Compare Offers: The Key to Saving
Finding the best mortgage isn’t about settling for the first proposal. The secret is to compare. You generally have three main options:
Visiting Multiple Banks in Person
Requires time and patience but allows for face-to-face negotiation.
Always ask for the FIPER (Personalized Information Sheet) to understand the exact terms.
Using Online Comparison Tools
You enter basic details, and you get initial estimates from various banks.
Typically provides a ballpark idea, though you’ll need to follow up with each institution.
Platforms Where Banks Compete (FinsBid)
Instead of your having to search, lenders present their best offers to you.
Saves time and often results in more competitive rates.
5. Negotiating with the Bank
Even if it sometimes seems like bank terms are non-negotiable, there is usually some wiggle room:
Interest Rate and Fees: Ask to eliminate or reduce fees such as opening or early repayment fees.
Linked Products: The bank may require you to set up a payroll account, purchase insurance, or use their credit cards. Push for minimal extra products, or ask for cheaper alternatives.
Grace Periods: Some mortgages offer an initial phase where you only pay interest. This can help if you expect high initial costs, but remember it can increase the overall cost of the loan.
6. Additional Costs You Shouldn’t Forget
Appraisal: Determines the value of the property.
Notary and Registration: Essential for formalizing the purchase and mortgage.
Administrative Services: Handling the paperwork.
Taxes (ITP or VAT + AJD): Depends on whether it’s a new or pre-owned home and the region where you’re buying.
7. Common Mistakes to Avoid
Not Comparing Multiple Lenders
May lead to settling for higher interest rates or less favorable terms.
Accepting Linked Products Without Checking
A high-premium life or home insurance can significantly increase the overall cost of your mortgage.
Focusing Solely on the Monthly Payment
You should look at the APR (Annual Percentage Rate) and not just the monthly payment.
Overextending Your Budget
If the mortgage payment exceeds 35% of your income, you may risk default.
8. Last Tips Before Signing
Read All the Fine Print: Mortgages are long-term contracts. Understanding every clause is essential.
Get Educated: If you’re uncertain, seek independent financial advice or consult FAQs on specialized websites.
Plan for the Future: Consider whether your income will remain stable and whether you could handle a rate increase if you choose a variable mortgage.
Conclusion
Getting your first mortgage is a major milestone. The key is thorough research, comparing multiple offers, and negotiating. At FinsBid, we simplify the process by having banks compete to offer you their best terms. Ready to save time and money? Join our waiting list and be among the first to access top-notch mortgages without the hassle.