A mortgage loan is a common banking product intended for the purchase of an apartment or commercial space. The terms for bank mortgage loans are getting more sophisticated and flexible. TBC Bank’s regional director Levan Diasamidze explains the crucial information every citizen, who wants a mortgage loan, should have before applying to the bank.
What is a mortgage loan and how does it differ from a consumer loan?
The general public understands the term “mortgage loan” in many ways. Quite often the term mortgage loan is used for any type of the loan that is guaranteed by real estate. Such usage is frequent and promoted by micro finance organizations, as they use the term “mortgage loan” as a type of collateral, not a type of loan.
However, in commercial banking, a mortgage loan has a different purpose than other types of loans. A mortgage loan is intended for the purchase of real estate – house, summer house or land. This is the main difference between a mortgage loan and a consumer loan: while the former is intended for the purchase of real estate, the latter can serve the various consumer needs of a customer (e.g.: purchase of TV, mobile phone or some other item).
What is the first thing a customer should pay attention to when getting a mortgage loan?
First of all, it is crucial the customer fully analyzes the obligations he or she assumes when receiving a loan, and understands that those obligations will have to be honored within a set time period. Consequently, the customer must determine whether his or her income source is stable and long-term. The customer also needs to analyze the risks that he or she will face in case of default.
After deciding that a mortgage loan is a rational decision, the customer needs to pay attention to the following points: the various commission fees related to loan disbursement; the effective interest rate; the fines in case of default or advanced payment; the loan repayment schedule; the loan currency and the loan duration. In order to completely understand all the obligations, it is important that the customer reads all agreements he or she signed when receiving the loan.
What is the difference between effective interest rate and annual interest rate?
Effective interest rate is the interest rate defined by the credit agreement and it reflects all the financial costs incurred by the loan recipient for the loan. Annual interest rate is the cost of the loan without considering additional costs.
That means it is important to compare not only annual interest rates but also effective interest rates when comparing the loan products offered by different financial organizations. This enables a customer to determine which offer is more beneficial.
Why do interest rates differ for mortgage loan in GEL and mortgage loan in USD?
A mortgage loan, compared to other credit products, is primarily a long-term product. There are different risks associated to GEL, USD, EUR or other currency depreciation in a long-term period. As a result, the stability of a currency or the cost of the loans a customer receives can change significantly in the long-term, which explains the difference in the interest rates on mortgage loans in different currencies.
In Georgian reality, the interest rate on loans in USD or EUR is lower than on loans in GEL.
What does a floating interest rate loan mean and what is the National Bank’s refinancing rate?
Lately there are many loan products with floating interest rates. For loans in USD, the reference rate is LIBOR, (LIBOR – London Interbank Offered Rate); for loans in GEL, the reference rate is the National Bank’s refinancing rate. Changes in the reference rate directly impact the loan interest rate.
For example, we have a loan with an annual floating interest rate of 12%. When the loan was received, the refinancing interest rate was 8%; if the refinancing rate changes to 7% after the bank gave the loan, our annual interest rate will change to 11%. If the refinancing rate increases, however, the annual interest rate on our loan will also increase.
What causes the change of interest rate and what are the trends since 2008?
The change of interest rate on credit products, as well as deposit products, can be caused by various factors, starting from our personal financial situation and ending with regional and global events. There is a direct correlation between a country’s financial stability and bank interest rates: the more stable and financially sustainable a country is, the lower the interest rates for banks to raise funds.
The situation has been more or less stable since 2008, and there is no significant increase in the price of loan products.
What is the major advice you would give to those wishing to purchase an apartment with a mortgage loan?
As I have already noted, it is important to really understand all the obligations related to getting the loan. It is necessary for customers to analyze their financial condition and the state of the country’s real estate market.
The decision to apply – or not to apply – for a loan should be made only after taking these issues into consideration. Once a customer decides to take a mortgage loan, all the offers from different financial organizations should be thoroughly analyzed: comparing effective interest rates, determining the currency of the loan and so forth.
In addition, it is very important that banking clients read the loan agreement and ask questions about aspects of the agreement that are unclear.