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Bank mortgage loan

The bank mortgage loan is one of the most widespread forms of financing. Owing to its financial characteristics, it is generally used for house purchases and building renovation work.

With a mortgage loan, the bank transfers a certain amount of money to the borrower, who undertakes to repay the amount (principal) plus interest calculated on the basis of a financial parameter (interest rate). The borrower pays the debt gradually over the duration of the loan in periodic instalments at intervals that can range from monthly to yearly.

Mortgages are ordinarily less costly than other forms of financing because the bank acquires collateral; in the case of a house purchase, the collateral consists in a lien on the property. Interest payments may be accompanied by additional costs (loan examination fee, property valuation fee, insurance premiums, notary fees, etc.). The composite cost indicator that banks are required to disclose to the customer before the loan contract is signed provides a summary of the total cost of the loan.

In general, mortgage loans are distinguished by the type of interest rate. With a fixed-rate mortgage, the rate does not change over the life of the loan, while with a variable-rate mortgage it can increase or decrease with respect to its initial level depending on the behaviour of a parameter chosen by the bank (Euribor). The amount of the instalment depends on the amortization schedule: there are constant instalments with variable rates (the duration of the loan changes), and constant, increasing or decreasing instalments with fixed rates.

The decision as to which type of mortgage best suits one’s needs must be based on a careful evaluation of how much the instalment will weigh on current and future income and of one’s ability to save. A well-considered and informed decision requires giving serious thought to the amount of the loan, the duration of the contract and the type of interest rate.

Recent legislative measures (the “Bersani” Decree, ratified as Law 40/2007) have made early repayment of mortgages easier. The penalties that banks had applied have been eliminated for new mortgages and reduced for those outstanding when the law entered into force (2 February 2007).