Among the RAE definitions for “differential” we can find “something that differentiates or serves to differentiate”. Well, the differential of a mortgage does differentiate, but not because it makes things different.
When you apply for a mortgage, financial institutions lend you money at an interest rate, which can be fixed or variable (the sum of a reference index and the spread). But what is the spread on a mortgage? We'll tell you what it is, how it affects you, and whether it's possible to negotiate or reduce it.
What is the spread in a mortgage?
The spread of a mortgage is the fixed percentage that is added to the mortgage benchmark in variable rate loans.
For example, if a mortgage uses the Euribor as a reference index, the most common, and adds an additional 1.5%, that figure will be the mortgage differential.
Who decides the mortgage spread?
Financial institutions are the ones who decide what differential to apply to their mortgages. This data is not usually fixed and universal for all mortgage loans.
How does the spread affect the mortgage loan?
In a variable rate loan, the spread is added to the mortgage reference rate, which is usually the Euribor. The higher the spread, the higher the interest on the loan. It's that simple.
How to calculate the mortgage rate with its differential?
The operation is very simple. You just have to add the differential to the reference rate. For example, in a mortgage at Euribor +1.5% with the Euribor at 2%, the resulting rate to be paid will be 3.5%.
This will be the interest rate applied when calculating the loan installment. The initial mortgage amortization table will reflect the loan installment until the interest rate revision.
With each review, which may be semi-annual or annual, the total interest rate will vary, but not the differential. Continuing with the previous example, if the Euribor rises to 2.5%, the new rate to be applied will be 4%.
The financial institution will always inform you of the interest rate and the amount to be paid at each review. It will also update the mortgage amortization table.
Is it possible to negotiate or reduce the spread on a mortgage?
Yes, everything is negotiable in a mortgage, although the limit will depend on each financial institution. There are more flexible ones and less so. In this sense, the interest rate, which is what defines the differential in variable rate mortgages, is not usually fixed. It can be negotiated and varied. In fact, it can even be reduced.
Typically, the mortgage spread varies depending on the solvency and personal situation of the person requesting the loan, on the one hand, and the number of years of the mortgage, on the other hand. Normally, clients with a better risk profile (fixed and stable job, savings and low debt level, among other things) obtain better conditions.
In addition, in subsidized mortgages the differential of the mortgage loan also varies according to the linked products you contract. That is, if you add home insurance, life insurance or direct deposit your salary to the mortgage, you will have a much smaller differential than if you do not do so.
In contrast to this type of loan, there are no-obligation mortgages where the conditions do not depend on the contracting of additional products.
