How to read the new Portuguese Mortgage Illustrations
Effectively Compare Mortgage Loan Illustrations
The mortgage illustration is a key step in the process of applying for a mortgage. After the thrill of looking for your perfect home, when you’re already dreaming of the day when you’re moving in, it’s time to get real and check your finances. How much will your dream really cost?
The illustration (basically a simulation of what your repayments will look like), now uses the European Standardised Information Sheet (ESIS) to help you make the best decision for you. This is particularly important when comparing different mortgage illustrations from separate loan providers.
Make sure you are comparing "apples with apples"
The ESIS came into force in January 2018 and exists to safeguard the rights of buyers and facilitate information flows so that an informed decision can be made with no mortgage regrets in the future. Mortgages must be comparable across providers and countries to inform sound decision-making and now come with a minimum cooling-off period of 7 days (starting from the moment the proposal is submitted).
In view of the intense demand for mortgage loans, the Bank of Portugal has issued guidelines covering the principles of responsible credit to prevent customers from making poor decisions. Thus, the previous Standardised Information Sheet (SIS) was replaced by the European Standardised Information Sheet (ESIS), a model that spans all the countries of the European Union with potential for adoption in the UK post-Brexit.
The ESIS is now delivered to the consumer at two points: when an illustration is made and at the time of approval of the loan agreement. The version that accompanies the illustration is based on the information provided by the client and is, therefore, only for guidance. The ESIS that is attached to the loan agreement already has the final details of the approved loan, and is therefore an imperative to read.
What changes with the ESIS? Part 'A'
The information provided in the ESIS is organised in two main areas: Part A, which contains the general conditions; and Part B, which sets out the specific loan conditions.
In reviewing Part A, among other information, you can check the main characteristics of the loan such as the amount, term, type of loan, type of interest rate and deemed worth of the property. In the “Main loan details” section you will also find one of the most significant changes introduced by the ESIS, which is the disclosure of the Total Amount Imputed to the Consumer (MTIC), which reflects the total cost of the loan to the client with the impact of interest and costs associated with mortgage loans. As a result, this figure provides a more realistic idea of the total costs that you are incurring, which is reinforced by an assessment of how much you will pay for every euro you borrow.
Important to understand the mortgage 'spread'
In mortgage terms, the spread is the difference between the (lower) rate at which the bank can borrow money at and the (higher) charge borrowers pay for an associated loan. To think a mortgage proposal with the lowest spread is the best can be misleading, because the spread only contemplates the margin that is charged by the credit institution to grant the loan, not taking into account the ‘other costs’.
The ESIS section “Interest rate and other costs” gives the breakdown of costs, commissions, expenses and insurance associated with mortgage loans, which are divided between just one-off costs and costs you will pay periodically.This part also contains the APRC (Annual Percentage Rate of Charge), to evaluate the real costs you will have with the mortgage.
In turn, the APRC covers these costs, whether they are commissions (opening commission, formalisation commission, evaluation commission, rendering commission, for example), expenses (Stamp Duty on the loan, expenses with records or house-ready service, attorney fees) or insurance (multi-risk property insurance, which is compulsory by law, and often also life insurance). By looking at the APRC from different proposals (provided that the loan amount and term are identical) you are thus comparing what is comparable, including those costs with other associated products that some banks propose to achieve a lower spread.
ESIS: Part 'B'
In Part B, the “Additional information to the ESIS”, you will find details on optional associated sales, tax expenses such as the IMT (Municipal Transfer Tax), the Purchase and Sale Stamp Duty and the necessary documentation for analysing the mortgage loan application.
If the illustration is carried out with a floating or mixed interest rate, the loan amortisation tables will also appear in this area: the first (‘Loan repayment table’) concerns the repayment of the loan at the contracted interest rate, and a second (‘TAN repayment table’) shows the impact if the index reaches the highest value of the last 20 years.
If the bank’s proposal includes engaging other products to reduce the spread, that information will be included in both Part A and Part B of the ESIS. In Part A, the section on ‘Additional Obligations’, (which may include an obligation to open and maintain an account with the bank granting the credit, as well as optional tied sales), makes clear that, although such related sales are not compulsory, they are indispensable to maintain the agreed loan terms.
This same warning is made in Part B; “Voluntary associated sales” section, which reinforces the importance of not only looking at the spread, but being aware of the extra commitments you are making. In the case of banks that do not engage in associated sales, it is much easier: the spread shown will not change, so it does not have to be bound by other charges.