What to watch out for if you need a mortgage for more than 80%

Contracting a mortgage to finance more than 80% of the purchase of a house has always been a risky operation.

Thomas Osborne
Thomas Osborne
16 July 2022 Saturday 23:05
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What to watch out for if you need a mortgage for more than 80%

Contracting a mortgage to finance more than 80% of the purchase of a house has always been a risky operation. Mainly, because the debt contracted with the bank is greater, which increases the risk of not being able to pay the monthly installments of the loan if there is an economic mishap.

In recent years, however, this risk has been significantly reduced. As the mortgages had very low interest rates, customers could pay very affordable installments, even if the bank lent them up to 90% or 100% of what the house cost. Consequently, many entities relaxed their approval criteria and launched to finance more than 80% of the purchase to applicants who presented a solvent profile.

But this era of low rates has come to an end. According to the financial comparator HelpMyCash.com, banks have made their mortgages more expensive due to the rise in interest that the European Central Bank will carry out on July 21. And since the installments on these products now cost more money, financing more than 80% of a home purchase is riskier. For this reason, if a person with few savings wants to apply for a mortgage loan, it is very important that they weigh all the dangers before applying for it.

The first thing to keep in mind is that repaying a mortgage of more than 80% costs more money. Logically, if the bank lends a larger amount, the installments that the client will pay will be more expensive. With an example it is easier to see it: suppose that a person wants to buy a house for 100,000 euros and takes out a loan with a term of 25 years and an average interest rate of 2%. If the entity finances 80% of the price (80,000 euros), the monthly payments will be 339 euros. On the other hand, if it covers 100% of the acquisition (100,000 euros), the installments will rise to 424 euros.

This wasn't a big deal a few months ago, when mortgage rates were at record lows. But the price of these products has experienced a significant increase so far this year: according to the Bank of Spain, their average interest has risen from 1.38% in December 2021 to 1.66% in May 2022. Like these loans now cost more money, the client may have more difficulty in meeting the installments.

For this reason, those interested in contracting a mortgage of more than 80% must ensure that they can afford these higher installments. According to HelpMyCash, it is essential that the monthly payments of all your credits, including the mortgage, do not exceed 35% of your net monthly income. Likewise, the client must have a stable job that allows him to face the payments of his loans during the entire repayment period.

Another aspect that must be taken into account is the evolution of housing prices. After several months of significant increases, it seems that the cost of houses and flats is beginning to stabilize: in May 2022 it increased by only 3.8% compared to the same period last year, according to the General Council of Notaries. The forecast, moreover, is that mortgages will continue to become more expensive over the next few years, which may reduce the number of sales (there will be fewer people who can afford to buy a home) and may force sellers to lower their economic claims.

In other words, if a person buys a house today, it may be worth less money in a few years. And that can cause problems if he contracted a mortgage to finance more than 80% of the operation. For example, if he wants to sell the home in the near future, he may not be able to pay off the loan with the proceeds from the sale. And if you can't pay the installments and the bank auctions the house to recover the money, it is possible that there is still outstanding debt after the repossession, so the entity could seize the rest of your present and future assets (your accounts, part of his salary…).

According to HelpMyCash, there are several ways to mitigate these risks. For example, the buyer can negotiate with the seller to lower the price of the house or can look for real estate in areas where prices have not yet skyrocketed. Likewise, it is not advisable to finance the operation with a mortgage of more than 80% if the client plans to sell the house in a short time or if his economic situation is not stable.

Banks are also aware that granting a mortgage of more than 80% is riskier now than it was a few years ago. For this reason, the vast majority do not offer these products, at least not openly. Even so, if the client's economic situation is good, they can still find finance companies willing to lend them up to 90% or even 100% of the price of their future home.

To find them, the simplest thing is to hire the services of a mortgage broker. Thanks to their great knowledge of the financial market, these professionals know which banks offer mortgages of more than 80% to people with a profile similar to that of the applicant. In addition, they have a great capacity for negotiation, which allows them to reach agreements more easily so that the entities increase the amount lent.

If the client prefers to go it alone, they can also contact several entities on their own and negotiate for them to finance up to 90% or 100% of the purchase. On the HelpMyCash website, several entities are mentioned that are willing to grant mortgages of more than 80% if the applicant enjoys a good economic situation or belongs to a specific profile that is considered especially solvent, such as civil servants or young people with salaries. elevated.