The hidden costs of a mortgage loan

I have recently been searching for apartments, not for the purpose of investing, but as a primary residence. I know, my house should not be seen as an asset and it is definitely not the smartest financial move I can do, however I do feel that I would be more emotionally comfortable if I buy my own apartment. Ultimately, you have to feel good about where you spend your money!

We currently own 2 small apartments which we rent short-term, we bought them relatively cheap and now we are checking the possibility of selling one of them, making a profit, and using that cash for our primary residence. As our primary residence would be a 3-bedroom apartment and in the capital city, we would still need extra cash to pay for it, which we currently do not have. And this is why we have decided to contact banks to understand how much would we pay for your mortgage. I am completely shocked and I have decided to share my concerns with you so that you can also be aware of all the costs you will face when asking for a mortgage.

First of all, there are taxes and costs related to the purchase of the house you have to take into account. If an apartment is advertised at 300k, do not forget you have to pay 300k + taxes + other costs. Depending on the country, normally you need to add at least 4% on the advertised price.

In terms of costs that you have to pay to the bank, there are a lot of small costs and the fact that banks do not generally merge all of those has a purpose, i.e., so that you do not clearly see how much exactly you have to pay. Be aware of:

  • Costs you have to pay at the beginning of the mortgage: depending on the country, those can include taxes on the mortgage (in Portugal you pay 0.8% on the value of the mortgage) + numerous small costs for formalising the deal, such as payment for evaluating the home and others. Those can easily increase the price of your home by 1% or 2%, which is relatively significant.
  • Interest rate: currently interest rates are very low which might be an incentive for people to buy real estate. Indeed, we were offered a 1% rate, which is quite low. However, even with a 1% interest rate, if we are considering a 300k loan, we would pay 65k of interest over the period of 40 years, i.e., an average of 135 Euros per month. In addition, in many countries, they do not offer you a fixed rate, but instead a spread on the Euribor. As the Euribor is currently around 0%, banks assume this will be the rate for the next 40 years when they provide you with the mortgage payment simulation. This is very misleading! Be aware that most likely interest rates will increase and, therefore, we would have to pay more than 65k.
  • Insurance: Because banks need to be protected in case you do not pay your mortgage, they generally request that you have both a home and life insurance. Normally they also have an insurance company in the group and they strongly recommend that you use their products. In our case, the costs of the insurances over a period of 40 years was almost 100k, i.e., almost 200 Euros monthly.

Even though this is all very country specific, I believe in general the rules are relatively similar in Europe. Of course the exact costs and %s will depend on the country, banks and your specific individual situation.

Summarising and just to give you an example with numbers, if you are buying a home of 300k, you will have to pay to the seller 312k. You will then have to pay the bank as initial costs around 3k, which makes the total initial cost of the property = 315k. If you are granted a 40 years’ loan, even with a low interest rate, you will pay 165k in total for both interest rates and other costs (mostly insurance). Total price of the apartment = 480k, 60% higher than the advertised costs of 300k.

Crazy, right?

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5 thoughts on “The hidden costs of a mortgage loan”

  1. Hi, I am shocked to see insurance cost so high, 200€ /month? Really high. Regarding the 480k figure, it’s also misleading in the sense that you are comparing money at different point is time (and I am sure you know better than me the time value of money). Because if one had cash to buy the house now, it would cost 300+ transaction taxes. Now, the question is if that is preferable to getting a loan and using the spare money to make other investment.

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    1. Indeed, for simplification, I didnt take into account the time factor. However, with so few risk-free options of where to invest your money it is difficult to know which rate to use to consider the time value of money. But indeed, you can always invest it in other riskier options and get a 6/7% return.

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  2. This is a good point. A lot of first time buyers are surprised when they learn the actual cost of purchasing – and subsequently owning real estate. I was however surprised to learn that 40 year loans are common over there? In Denmark, we only have 30 year loans, and many people even opt for 20 year loans. The average mortgage in Denmark is repaid in 7 years though… this is obviously because people move πŸ˜‰ So I think it’s worth noting that not many loans will actually run for 30-40 years… The next thing you then have to consider, is the Price of selling properties as well – it’s also quite high.
    That being said, I think what you’re doing makes perfect sense, as long as you’re aware of the lifestyle inflation ghost πŸ˜‰

    Good luck in your future endeavours! πŸ™‚

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    1. Hey Nick, indeed it is pretty common 40 year loans in Portugal because it is a country with relatively low salaries and therefore it would be impossible to pay the monthly rate if the loans were 30 years or less. But as you said, even in countries where it is common to go on a 20 year mortgage, people end up moving and having almost all their life with a mortgage because they just renew it once they buy a bigger/better house.
      Indeed, I am suffering a bit from lifestyle inflation, that’s the dilemma right now πŸ™‚

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