WHAT IS THE MORTGAGE
The loan, in legal terminology, is ” the contract by which one party delivers
to the other, a certain amount of money or other fungible things and the other undertakes to return as
many things of the same kind and quality “.
In common usage, when we talk about ” mortgage ”
we immediately think of the bank loan contracted for the purchase of the house,
but the meaning is much broader and includes any form of a loan of money or other so-called “fungible”
things that provide the obligation to repay the beneficiary.
Limiting the scope of the discussion to bank loans, the subjects involved are:
- the borrower, i.e. the person requesting the loan;
- the lender, i.e. the bank or credit institution that grants the loan.
The bank loan is characterized by the fact that the borrower is obliged to repay the financed sums plus interest.
Interest is determined by the sum of two components:
- the reference interest rate;
- the spread.
The reference interest rates currently in force in the interbank market are:
- EUR IRS, used as an indexing parameter for fixed-rate mortgages;
- EURIBOR is used as an indexing parameter for variable-rate mortgages.
The value of the Errors
The value of the Eurirs varies according to the duration of the loan:
there is in fact the Eurirs “at 2 years”, “at 5 years”, “at 10 years”, “at 15 years”
and so on and is characterized by being more the longer the duration of the loan.
The value of the Euribor, on the other hand, varies according to the frequency of the installment,
ie if the mortgage installments have a monthly maturity, reference is made to the 1-month Euribor;
if quarterly, at 3-month Euribor; if six-monthly at Euribor 6 months.
To the interest rate component of reference, the so-called spread is added
which represents the intermediation margin of the Lender credit institution.
The spread is therefore what the bank earns in lending the money to the borrower
and depends not only on the duration of the loan but also on the purpose for which the loan is requested.
Banks, therefore, apply a different spread depending on whether the loan is intended
for the purchase of the first home, second home, or other liquidity needs.
The repayment of the capital and the interest thus determined (reference rate + spread)
takes place through monthly/quarterly or half-yearly installments according to a repayment plan called an “amortization plan”.
The installment deadline is not always the last day of the month as the bank could drop the installment deadline
even on the same calendar day on which the loan deed is stipulated. In this second case,
it is said that the loan “goes into amortization” on the same day as the signing of the deed and therefore the first installment,
consisting of principal and interest, expires exactly the following month, on the same calendar day in which it is stipulated.
the loan agreement (example: it is stipulated on February 4th and the first installment expires on March 4th).
If, on the other hand, the loan payment expires on the last day of the month,
the period between the signing of the loan agreement and the last day of the month
in which the contract was signed (or the next one, as this depends on the bank), is called ”
pre-amortization” and in this period only interest is charged. The pre-amortization
interest is paid either together with the first installment at the end of the following month
or with an interest-only installment due on the last day of the month in which the contract is stipulated.
The installments are made up of “capital shares” and “interest shares”.
Most amortization plans are characterized by the fact that the principal amounts are
“increasing” against “decreasing” interest rates. It is called the “French” amortization plan.