Before requesting a mortgage, you should familiarize yourself with terms such as interest, amortization, APR, endorsement, subrogation, guarantees, principal, differential or appraisal. Another of the concepts that you have to know, perhaps less common but no less important, is that of mortgage deficiency.
The mortgage default or grace period of a mortgage loan is a time during which the amount of the monthly mortgage payments is reduced. This reduction can consist only of the amount corresponding to a part of the mortgage (interest or principal) or of completely deferring the payment of the installments for several months and even years.
The grace period of a mortgage loan is an exceptional measure that is usually requested in compromised personal situations or when a person goes through financial difficulties. With this figure, banks intend to give their clients time so that they can solve their situation and face future mortgage payments with guarantees.
Applying for a mortgage grace period is usually subject to a number of conditions and is associated with a general increase in mortgage prices. In addition, availing themselves of this measure implies extending the life of the loan, for which the holders undertake to spend more time “linked” to the bank.
For these reasons, many people wonder if it is really worth requesting a grace period or if there are other options to negotiate a deferral of installments due to the risk of non-payment.
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What is the lack in a mortgage loan?
The lack of a mortgage loan is a variable period of time in which a bank and its client agree to temporarily ” pause” the obligations contracted in the signing of a mortgage or a loan.
Unlike what happens in periods of lack of insurance, where the client temporarily loses coverage of certain services, the mortgage deficiency only means being exempt from paying part or all of the mortgage installments. For this reason, some banks offer the default as a formula to make their loans more attractive.
For clients, the possibility of enjoying a mortgage deficiency can be an incentive to opt for one entity or another when buying a house. In this way, they are guaranteed to postpone the installments if problems arise in meeting the payments.
Types of lack of a mortgage loan
The grace period of a mortgage loan and its conditions can change a lot from one bank to another, since these are agreed individually between the entity and the client. As a general rule, the usual grace period is between three months and two years.
The two types of mortgage deficiency are:
- Deficiency of amortization. In this case, the bank offers to temporarily reduce the mortgage payments. That is, for a few months the client pays only the interest on the loan, without amortizing the capital. In exceptional cases, banks offer the possibility of amortizing the expense corresponding to capital and what is deferred is interest (no interest).
- Total lack. As its name indicates, it is about the total suspension of the payment of the installments, without assuming neither the interests of the mortgage nor the amortization of the capital.
Why ask for a mortgage loan?
The deficiency is usually granted in loans and mortgages with a high loan. The most common type is the lack of amortization or partial grace.
This mechanism is not only useful for people who are going through a bad economic streak. Sometimes, the possibility of paying reduced installments is a stimulus when buying a home or starting a business.
For entities, it is a mechanism that reduces the risk of continuous defaults. In this way, the financial pressure on the client is relaxed, especially at the beginning of the loan. In fact, some mortgages are marketed directly with an initial grace period of two years in which the monthly installments paid by the client are minimal.
Is it worth applying for a grace period on the mortgage?
Waiting periods are an important claim with which financial institutions try to attract new customers.
However, this partial “respite” is not free and has some drawbacks, including a delay in the loan maturity date and an increase in interest, with the consequent increase in debt.
Let’s take a practical example: imagine that you apply for a mortgage loan at BBVA of € 120,000 with a repayment term of 20 years, Euribor interest +1.25% (variable APR of 2%) and a monthly payment of € 564.65.
If at a certain moment you ask for a 24-month grace period (maximum time), during the next two years you will pay monthly installments of just over € 120, which are really the interest on the mortgage. This represents around 75% less compared to the initial fees.
However, once this time has passed you will have to assume monthly payments of € 619.98 (if the same interest rate is maintained), which is 9% more than your initial fee.
The cost of the loan after a deficiency is, on average, 5-6% of the total value of the mortgage.
On the other hand, when we request a deficiency in our mortgage it is necessary to carry out a mortgage novation. The novation is the modification of one or more aspects of the loan contract (extension of the repayment term or the interest rate) agreed after its signing. These changes are applied to the capital pending repayment.
Most banks establish a commission for this management that ranges from 0% to 1% of the total amount of the loan. In addition, by signing the novation conditions, some entities may increase the interest on the mortgage or force the client to contract more products linked to the entity (insurance, pension plans, etc.).
What other options do I have?
Given the impossibility of assuming the mortgage payments, our recommendation is to go directly to the bank and expose your financial situation to find a solution and negotiate as soon as possible the most beneficial option for both parties.
Requesting a grace period is one of the usual alternatives, although it is possible that the financial institution only accepts to grant this measure if a few years have passed since the mortgage was granted or if it requires compensation. In this second case, it is convenient to make an assessment of the new conditions to know whether or not you are really interested in accepting the deficiency.
Another alternative is to request an extension of the repayment period of the mortgage. The “problem” is that you will also have to make a mortgage novation, with the expenses that it entails, and agree on new conditions in the mortgage that will include an increase in interest and a higher cost of the loan.
Finally, you can choose to request a personal loan that would increase the indebted capital and allow you to assume the installments, although you must return the amount with a higher interest rate.
Mortgages are complex financial products, full of details and specifications. If you are thinking of applying for a mortgage or a loan to buy a house, let yourself be advised by professionals. At Tajarat properties we will find the best mortgage for you and solve all your doubts.