Mortgage lending: How to calculate your mortgage

Calculating the amount of a mortgage is one of the issues that most concern those who are interested in buying a home. For most mortals, it is quite difficult to get the numbers right. In addition, as is evident, it is a fundamental issue when it comes to knowing whether or not it is possible to make the payment. In this article we will try to discuss everything you need to know about mortgage loans in this regard so that you can better understand where the money you pay or will pay each month comes from.

Context of the current mortgage amount

The mortgage situation in Spain has changed a lot in recent years. Ten years ago, obtaining a mortgage loan was relatively easy, as banks tended to grant them almost automatically. This was due, among other things, to the fact that the mortgage law was very favourable to them in all respects. Now, however, this is not so much the case due to recent rulings by the European Court of Justice (e.g. floor clauses) and the Supreme Court.
 
To this must be added the fact that the unemployment rate in Spain is well over 20% and that it is especially high among young people under 30 years of age, who are those who, as is logical, tend to be most eager to buy a home in order to emancipate themselves. As a result, financial institutions impose tougher conditions for granting mortgages.

How to calculate a mortgage?

Calculating a mortgage depends on many variables. In fact, each bank is quite free to impose some of its own variables, although it is true that others are established by higher-ranking bodies. This is the case, for example, of the famous Euribor. In any case, in general, the mortgage calculation formula used is as follows:
Monthly instalment = Principal x Interest / 100 x (1 - (1 + interest / 100) - term)
 

To make it easier to understand, the 'Capital' is the amount of money you still have to pay. If, for example, you took out a mortgage loan of 120,000 euros and you have already paid 30,000, the figure to be applied here is 90,000. The 'Interest' refers to the current monthly interest rate, i.e. the annual interest divided by 12. For example, if the applicable rate is 6%, the 90,000 euros will be multiplied by 0.5. Keep in mind that this percentage, unless you agree to a fixed rate with your bank, varies from time to time, so it will be adjusted accordingly each time the mortgage is reviewed. This can happen, in the case of variable rates, every 6 or 12 months, depending on the case.

The other concept that needs to be explained in this formula is the 'Term'. This refers to the time in months that you have left to finish paying the mortgage. For example, if you have 10 years left, the figure will be 120 (10 years x 12 months = 120 months). We would like to clarify, just in case the formula appears confusing, that this figure is not subtracted as it does not say 'less term' but 'raised to less term'.

This formula is known as the 'French mortgage calculation model', which is the most commonly used in Spain to calculate the mortgage repayment instalment. As long as you do not have one with a grace period, special or increasing, it will be the one applied to determine the amounts you must pay each month.  

Mortgage calculators

Still wondering how to calculate my mortgage? If so, don't worry. It is normal that, despite knowing the formula, you will not be able to determine the exact amount, as the calculation is not as simple as it may seem beforehand. After all, there are data that only the bank knows. That's why, in many cases, they provide you with a mortgage calculator that does the work for you.

The ING mortgage simulator is, without a doubt, one of the most accurate and interesting you can find. Obviously, it is only valid for the conditions of this bank, although it is useful to get a fairly approximate idea of the amount of instalments that you would have to pay in any other bank.

The aspects taken into account by this mortgage simulator are the following:

1. The number of mortgage holders. This can be one, two or more.
2. Monthly income of all holders. The net amount earned by those applying for the mortgage. 
3. Monthly expenses derived from other loans. At the moment, there is an unwritten rule that banks do not give mortgage loans whose monthly amount exceeds 35% of the net income of the applicants. For this reason, it is important for them to know if there are other loans in force.
4. Age of the eldest of the holders. This section is used to determine the maximum number of years in which the mortgage can be amortised. Generally, it ranges between 10 and 40 years. 
5. First or second home. This is another important section. And the fact is that, in tax matters and when applying certain interest rates, those who want to buy a house to use as a first home have certain exceptions and allowances.

Other aspects that can influence a mortgage repayment simulator are the commissions applied for opening, cancellation, maintenance, etc. Therefore, it is important that, in order to know the exact amount you have to pay, you contact the bank in question. You should bear in mind that an online mortgage repayment calculator is simply a tool for guidance and information, however accurate it may be.

We hope we have been of help and that, from this very moment, you know exactly how your bank acts when calculating your mortgage repayment instalment.

Contact us if you need more information