What is it with the mortgage differential rates? When you apply for a mortgage, the bank applies an interest rate to the money it lends you. In the case of variable rate mortgages, the monthly instalment to be paid consists of two parts: the repayment of the loan and the benefit obtained by the entity.
This second part is the so-called Nominal Interest Rate (TIN), which is calculated from the sum of the reference interest rate (the Euribor in most cases) and the spread.
Nominal Interest Rate = Euribor + Spread
You should keep in mind that TIN is different from the APR (annual equivalent rate).
The APR includes all the expenses and bank fees of a loan, so it reflects the real and effective cost of a loan.
Mortgage differential rates
Therefore, the spread on a mortgage is a fixed percentage that is added to a benchmark index to determine the interest rate.
As the formula indicates, the lower the spread, the less you will have to pay for the mortgage.
This interest is reviewed every year and will change depending on the evolution of the Euribor, while the spread remains unchanged for the duration of the contract.
The spread varies depending on the bank you choose, and even its offers change between various times.
In fact, entities usually always adjust it to their needs.
When they need to raise more money through loans, they choose to reduce the spread, so that the interest on mortgages decreases to make them more attractive to the customer. Instead, when they have already met their business objectives, they raise the spread to moderate the incentives.
Mortgage differential rates acquisition
The most common is that the lowest differential is offered in the initial and final phases of each year: at the beginning because the acquisition objectives are established and it is sought to promote their achievement, and in recent months when they have not yet been met and you want to give a boost to marketing.
For the cost of your mortgage to be as low as possible, it is in your interest that the Euribor is as low as possible and that the spread is also reduced.
It is not an easy task given that, if the Euribor is at lows as in recent years, the bank will try to set a higher spread to compensate and make the operation profitable for them. That said, the Euribor is not something you can trade, but the spread is.
To get better conditions on the spread, you can accept some product linked to the loan.
The most common have to do with direct debit of payroll, pension plans and home or life insurance. By including one or more products, the bank will agree to apply a lower spread to you.
However, this is an aspect in which you will have to consider. All these associated products carry a cost that adds to that of the mortgage, so, depending on the situation, accepting them may lead you to end up paying a higher cost than a higher differential would entail.
Mortgage differential rates importance
That is why it is important that you look for alternatives, compare and make your own accounts. Life and home insurance are usually necessary products to contract any mortgage, but you can contract them with third parties, it is not mandatory to do so with the bank in question.
With the Euribor so low, it will be exceedingly difficult for you to find a spread below 1%. Imagine that you sign a loan with annual review and a spread of 1.4%, while the Euribor marks 0.163% in the last annual review. In this case, the interest on your mortgage for that year will amount to 1.563%.
Given your interest in reducing the spread, your bank offers you the following possibilities with associated products:
-If you direct debit your payroll, a 0.4% bonus will be applied.
-If you take out life insurance, the spread will decrease by 0.25%.
- If you buy home insurance, it will go down another 0.25%.
The option of domiciling the payroll and contracting home insurance fits you, but life insurance is not of interest to you at all. If you accept the first two, the bank will offer you a 0.65% discount. Thus, the interest rate would fall to 0.913%, an attractive reduction.
The spread is a key factor when determining the closing price of a variable rate mortgage, or in the variable tranche of a mixed mortgage. Its importance is much less in fixed-rate loans, where the monthly fee will be fixed from the first moment and will not be subject to variations.
You should keep in mind that, if you decide to accept a high spread and eventually the Euribor experiences a rebound, interest rates may skyrocket. It is not a remote possibility: most mortgages in Spain have a term between 20 and 30 years.
In this way, the differential is a determining element for the cost of your mortgage. But in parallel, there are other aspects that you should also keep an eye on, from the commissions that the bank can set to the evolution of the Euribor.
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