The fixed rate mortgage is one of the types of financing aimed at the purchase of goods or services that can be made in Italy. The purpose for which a fixed rate mortgage is usually stipulated is the purchase of a home. It is also possible to use this solution for other purposes, in these cases we speak of mortgages for
- restructuring, aimed at building works of real estate
- building, distributed to finance building works
- liquidity, granted to meet financial needs
- unsecured loans, little used, similar to a loan due to the lack of the mortgage
Fixed rate mortgage
All types of loans can be disbursed both in the variable rate and in the fixed rate formula. To understand what fixed rate means, it is necessary to understand what the interest rate in a mortgage is .
In a mortgage the interest rate is the price to pay for borrowing the money , it is expressed as a percentage and can be applied in different ways. One of these is the fixed rate.
The fixed rate is the percentage to be paid for the disbursement of the loan agreed with the bank, it is calculated so as to be paid in installments of constant value for the entire duration of the amortization of the loan. This percentage does not change over time and therefore remains fixed until the loan expires.
Fixed rate and French depreciation
It should be noted that in Italy the banks provide mortgages with a French repayment plan . The French amortization plan provides for a composition of the loan installment which varies over time. For accuracy it varies with each installment. The fixed-rate mortgage therefore, despite having a constant installment, does not have the same interest component for each installment. Due to the French depreciation the interest rate is very high with the first installment and decreases over time until it reaches zero with the last installment.
It could therefore be thought that this is not really a fixed rate mortgage as the interest component varies with each installment. It is not so. The rate is proposed by the bank during the negotiation phase and is calculated by adding a percentage of profit (the spread) to the current rate for financing fixed-rate money (the EurIRS). The rate thus calculated, EurIRS + spread, will not change for the entire duration of the loan and the installments will all have the same amount. What changes is the composition of the individual installments, but this has nothing to do with the rate applied which, in fact, is fixed.
The composition of the fixed rate mortgage installment
I have already mentioned the composition of the fixed rate mortgage payment in the previous section. It is appropriate to analyze it a little better to understand well what you pay and to whom with the mortgage payments.
The mortgage payment has two components called shares
- share capital
- interest rate
The principal amount is the one that is paid to repay the loaned money, the interest rate is the one that is paid so that the bank that has disbursed the loan has its own profit in the operation.
The interest rate in turn is calculated by adding two different interest rates
- the Eurirs
- the spread
Euro interest rate – EurIRS
The EurIRS (Euro Interest Rate Swap) is the rate at which the money from banks is purchased to cover the risk. In theory the banks buy the money from the main European credit institutions to be able to lend it to those who request it, paying it at the EurIRS rate. In practice this is not the case because banks can also use the liquidity they have to lend money in the form of loans or mortgages (and other forms of financing such as loans). It is interesting to note that among the liquidity of a bank there is also the money that is deposited on current accounts.
The spread in the mortgage
The spread is therefore the part of the interest portion with which the bank realizes its profit on the loan transaction (the only source of income when the loan money is also financed).
Usually, when a bank advertises a mortgage, it only communicates what the spread is applied to. This rate of communication is correct because any changes in the EurIRS cannot be controlled by the credit institution. If the loan is granted, the final rate calculated according to the EurIRS + spread formula at the time of the stipulation on the basis of the current EurIRS will be known.
It is not the case to fear that there may be bad surprises when the loan is disbursed, usually the fluctuations of the EurIRS are minimal and have a negligible influence on the installment.
The guarantees covering the fixed rate mortgage
When a bank issues a loan it always asks for a guarantee to cover the risk of insolvency.
The forms of guarantee usually used by banks are
- mortgage bills
The mortgage for the purchase of a property is usually a mortgage . This means that to guarantee the payment there is the same good that you buy with the borrowed money. The formula is that of the mortgage.
In addition to these guarantees, banks can request the obligatory stipulation of insurance policies
- against the fire and the explosion of the building subject of the loan
- on the life of those obliged to pay installments
- against the risk of unemployment or invalidity of the obliged
In very rare cases and for particularly high property values, banks may request the purchase of put options against negative equity , to cover the risk of real estate depreciation.