Summary
What is interest and what types exist in the market?
The interest rate is the price we pay the lender for the money they have lent us. It directly affects the monthly payment; the higher the interest rate, the higher the payment.Generally speaking, there are three types of mortgage loans that differ in how the interest rate is applied. These are fixed-rate mortgages, variable-rate mortgages, and mixed-rate mortgages.
- Fixed interest rate: This rate remains constant and stable throughout the loan term, regardless of market fluctuations. The main advantage is the stability and peace of mind it provides: the customer knows exactly what their monthly payment will be for the entire loan period.
- Variable interest rate: as the name suggests, it changes throughout the life of the mortgage loan. It is calculated taking into account two factors: the reference index (which fluctuates with market changes) and the spread (agreed upon with the bank). The most widely used reference index today is the Euribor , which is currently at record lows. Its drawback is that it is subject to market fluctuations and can cause monthly payments to increase or decrease considerably in the medium or long term.
- Mixed interest rate: combines the other two interest rates. At the beginning of the mortgage loan, a fixed rate is usually established (for a period that can reach 15 years). After that period, the mortgage will have a variable interest rate, and the payment will fluctuate depending on the market situation.
-
Find out how much we can finance for you
- It's said that getting a mortgage is a slow process, but it turns out you can calculate yours in two minutes.
How is the payment amount calculated and what types of payments are there in a mortgage loan?
The installment is the amount that a loan borrower pays periodically (usually monthly) to the lender until the borrowed amount plus the agreed-upon interest is repaid. As mentioned earlier, the installment is calculated based on the loan principal, the agreed-upon interest rate, and the loan term. The higher the loan principal and the interest rate, the higher the installment. However, the longer the term, the lower the installment, although the amount allocated to interest payments will increase. There are different types of installments, but the most common are:- Fixed installment: This is the most common type of mortgage in Spain, following the so-called French amortization model. With this type of installment, the customer pays a constant amount of money during the fixed-rate period of their loan. Once the fixed-rate period ends, the installment is calculated at each review, usually annually or semi-annually, based on the performance of the reference index plus the agreed-upon spread. This installment consists of principal (the portion of the installment used to reduce the outstanding loan amount) and interest (the portion of the installment used to pay the lender for the borrowed amount).
- Increasing or progressive installments: the customer pays a lower installment at the beginning of the amortization period, which then increases by a predetermined percentage each year. Thus, during the first months or years of the mortgage, the installment will be lower compared to a fixed installment, but it will increase year after year during the progressive installment period. Once the progressive installment period ends, the installments will be reviewed based on the outstanding principal, the remaining amortization period, and the interest rate resulting from applying the reference index plus the spread agreed upon with the lender.