Mortgage credit

banking

Mortgage credit is a type of credit that is backed by a mortgage guarantee.That is, if the debtor of the loan could not pay the installments, the creditor could get to keep the mortgaged asset (usually a home).

This credit is aimed at the acquisition of real estate (usually a home). It is important to note that the maximum amount of the loan will be the value of the property. You cannot grant a credit for an amount greater than the property you want to acquire. For example, if the home is valued at € 200,000, the credit cannot be higher than that amount, but it can be lower.

In short, a mortgage loan can only be granted for the acquisition of real estate, with the maximum limit of its value.

Characteristics of mortgage loans

The mortgage guarantee is the main characteristic of mortgage loans. When formalizing the operation (when buying the property with the credit granted by the financial institution), the acquired property is encumbered with a mortgage.

In this way, if the credit default occurs, the financial institution or creditor could execute this mortgage guarantee. This execution consists of the fact that the financial institution could sell the property on which the mortgage rests to satisfy the outstanding debt. Here we would find two situations:

  • If the amount obtained from the sale is greater than the outstanding debt, the remaining part must be paid to the debtor. For example: if the entity manages to sell the property for € 100,000 and the outstanding debt was € 60,000, the remaining € 40,000 must be paid to the debtor.
  • If the amount obtained from the sale is less than the outstanding debt, the financial institution may go against all the present and future assets of the debtor, until all the debt is satisfied.

It is important to note that the debtor's responsibility is both with the mortgage of his property and with the rest of his present and future assets.

Therefore, we find that in a mortgage loan there are additional guarantees to other loans, such as personal ones. These additional guarantees mean, for example, that the applicable interest rate is lower than in other credits.

When to apply for a mortgage loan

Unlike others, the mortgage loan can only be requested under certain conditions: only for the acquisition of real estate and with a maximum limit of its market value. However, it is not always necessary to apply for a mortgage loan when you are going to acquire a property.

You have to take into account personal circumstances. For example, if you have the money, you have to assess whether it is worth paying the interest associated with the credit or not. And the existence of other forms of financing such as a loan must also be taken into account.

Main differences between a credit and a loan

In banking, a ‘loan’ and a credit, although they are similar, have differences. In credit, the bank provides the client with an account, where the client will access the amount of money he needs and he usually pays the requested credit periodically, with the expenses and interests added by the entity.

For its part, in a ‘loan’ the bank makes a fixed amount of money available to the debtor, which must be returned, along with interest, in a predetermined time. It is usually a medium or long-term operation, which is amortized in regular installments, as the client pays for it.

However, in both cases, it is the banking institution that lends money so that within a certain period it is returned along with some interest (principal + interest).

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