I remember perfectly a finance professor that I had at the University, and the answer that he always gave us when someone asked him a doubt regarding to any financial formula: “Don´t worry, when it´s not an example on the blackboard, but your own real money, you are going to understand it perfectly”. And with the years passing and my experience, his saying -which seemed to me like a clear evasion of his teaching responsibility- it makes more sense nowadays, I subscribe to it absolutely.
Well, those doubts are just what comes up to anyone by the time of hiring a financial product, and in this case of financing a house, there is no difference. Therefore, the answer to the question that is naming this article: “Asking for a mortgage or a personal loan?”, I say: depends on diverse factors. Mainly they are: the amount that we need to finance, the timing regarding to our monthly repayment capability and the time that we have before making the investment.
So, along this article, we are going to analyze which are those factors and how they affect the total cost -which is the most important thing- before making any decision.
AMOUNT OF FINANCING
When we are asking between 30.000€ and 40.000€, what is going to be more interesting for us is a personal loan. In fact, majority of financial entities do not have on their portfolio, mortgages under that amount. This is because the expenditures involved in a mortgage constitution for both sides (bank and client), will make that the interest rate is not worth it.
As we saw in a previous article -so we are not going to extend too much in this point-, there are various Taxes and expenditures when buying a house and like we detailed in the same, they are going to be around 10% over the buying price if we ask for a mortgage. However, in a personal loan, the unique cost could be the notary fees, that is around 0.3% of tariffs over the amount of financing.
Another factor that determines the choice is the application procedure in the financial entity that we choose. While for a personal loan is only asked for basic documents like the payroll, labour contract and some others personal data. In a mortgage procedure they make a more detailed risk analysis which takes time, and it is not less than one month. Therefore, depending on the time that we have for accomplishing the operation, it would preferable one option or another.
TIME AND QUOTA GO BY THE HAND
Of course -and this is basic mathematics-, if we have more time to pay something, logically, the monthly payments are going to be lower than if we have less time.
Bellow, we are going to see a comparative table, in which there is a calculation for an amount of 60.000€, based on the conditions of a personal loan for 8-year loan, and a mortgage for 20-year mortgage:
As we can see in this example, the total cost for a mortgage is superior than the personal loan, although the monthly quota is a lot higher in the case of a loan. Therefore, depending on our monthly repayment capacity, meaning, if we can spend more than 800 € per month for paying back the loan or not, we could decide for the first option or the second one.
However, if instead of 60.000 € we make the same simulation for 90.000 € or 100.000 €, it is worth paying those mortgage constitution expenditures, since on one hand we would be paying a lower interest rate -currently it is even under 2%-; and on the other hand, we would be comparing a monthly quota of more than 1.000 € in case of a loan, against a quota of barely more than 400 € in case of a mortgage.
Certainly, it is convenient making a financial assessment depending on the house that you want to buy and our profile, with the purpose of choosing the most ideal choice for us. In fact, I always recommend to my clients going to the bank before starting the search, to avoid fake expectations once we are in the business, that can create a frustration.
In this way, and after overcoming this first step, it is already a matter of going to buy a house in a calm way, with the security that the financing will not be a problem.