Capital mortgage is a type of long-term mortgage loan taken out for the purpose of purchasing or building a real estate, secured by a mortgage (real estate or its share) (P. S. Calem, 2011, pp. 22-24):
- purchase of a flat or a single-family house,
- purchase of a communal or company flat,
- repayment of a housing loan.
In the case of construction, finishing or major renovation (for which a building permit is required) of a single-family house or flat, it is referred to as a construction and mortgage loan, which differs from an ordinary mortgage loan, inter alia, by the fact that it is paid not once, but in the so-called tranches 6 (C. Basten, C. Koch, 2014, pp. 3-5).
Types of capital mortgage
Banks offer a quite wide range of capital mortgage loans. It stands out among other (A. Hoebeeck, K. Inghelbrecht, 2017, pp. 4-8):
- Home capital
- Capital for building a house,
- Capital for repairs and extensions,
- Capital for building land,
- Capital for the purchase of a tenant's apartment,
- Capital for the construction of a garage or other building,
- Capital for the purchase or construction of a holiday home.
The process of obtaining a capital mortgage
Persons seeking to obtain a mortgage must first and foremost be patient. Capital mortgage has nothing to do with a cash loan, which can often be obtained on the same day that we make the decision to borrow it (K. A. Adetiloye, 2013, pp. 43-45).
The entire effort process up to the moment of granting a mortgage loan is time-consuming and requires a lot of attention and commitment. It is possible to present this process in several basic phases (K. A. Adetiloye, 2013, pp. 43-45):
- Choosing the right bank,
- Signing a preliminary contract for a flat or house,
- Completion of all documents required by the lender,
- Completion and submission of a credit application together with the required documents,
- Waiting for the bank's decision; possibly filling in missing documents,
- The signing of the loan agreement,
- The granting of credit.
As with any loan, it is based on creditworthiness, i.e. the ability to repay all principal and interest payments on any scheduled date (L. Goodman, 2017, pp. 23-26).
It is calculated and estimated by the bank on the basis of many different information obtained from the customer, e.g. information about the amount of earnings, the size of other current loans or liabilities. For this reason, all information provided should be true (D. Feschijan, 2008, pp. 273-280). It should be remembered, however, that the bank, using the database of institutions such as Credit Information Bureau or Economic Information Bureau, verifies all relevant information (L. Goodman, 2017, pp. 23-26).
Creditworthiness is closely related to the amount of credit that a bank can grant to a customer. The Bank estimates whether the borrower will be able to repay the loan in the desired amount within a properly set time limit (D. Feschijan, 2008, pp. 273-280).
More precisely, the creditworthiness is calculated by a credit advisor who uses an appropriate computer program for this purpose. The latter gives the interest rate of the loan and the amount of installments, and then the bank estimates whether the surplus of the customer's income over its fixed expenses gives the customer the possibility to repay the determined installments (D. Feschijan, 2008, pp. 273-280).
The whole procedure has a legal basis (banking law) and is associated with the caution the bank is required to exercise when granting loans, especially for such large amounts and long periods of time as mortgage loans. It should be noted, however, that the creditworthiness calculated for a given customer in different banks may differ slightly, so it is worth checking it in several places (D. Feschijan, 2008, pp. 273-280).
Capital mortgage loan interest rate
The way in which the loan is remunerated is one of the most important issues to be paid special attention to (V. Michelangeli, E. Sette, 2016, pp. 15-21). In the case of mortgage loans as well as other loans, there are two types of interest rates (V. Michelangeli, E. Sette, 2016, pp. 15-21):
- Fixed interest rate - the amount of interest is unchanged; it occurs less frequently, rather in the case of promotional campaigns, e.g. during the first few months of loan repayment.
- Variable interest rate - the amount of interest may change according to the money situation on the interbank market; the most frequently used interest rate, especially in the case of long-term loans (P. S. Calem, 2011, pp. 22-24).
Own contribution and duration
Taking out a capital mortgage is connected with the notion of own contribution, which means the amount of own funds in relation to the value of the real estate on which the loan is taken out, which the bank requires in order to provide the loan (Anonym, 2019, pp. 7-16).
The customer's own contribution rates may vary from bank to bank, but under banking law, the customer's own contribution may not be lower than 20% (Anonym, 2019, pp. 7-16).
On the other hand, according to the current rules in the banking law in Poland, the time for which a mortgage loan may be granted may not exceed 35 years (P. C. Mosser, J. Tracy, J. Wright, 2013, pp. 6-12).
The age of the borrower has a fairly significant impact on the granting of a mortgage loan. Banks usually assume that the borrower will be able to repay the loan until they are actively working. This means that in most banks, the mortgage loan has to be repaid by the end of retirement. Because it is impossible to determine this age due to changing legislation, it is usually agreed that the borrower has to be 65 or 70 years of age to repay the debt (P. C. Mosser, J. Tracy, J. Wright, 2013, pp. 6-12).
Some banks may allow this age limit to be extended, but only if the borrower obtains additional life insurance or adds another, younger, creditworthy person to the loan (C. Basten, C. Koch, 2014, pp. 3-5).
- Adetiloye K. A., (2013), The National Housing Fund, Mortgage Finance and Capital Formation in Nigeria, International Journal of Business and Social Research (IJBSR), Volume -3, No.-7,
- Anonym, (2019), Mortgage Insurer Capital Adequacy Test, No: A Effective Date: January 1,
- Basten C., Koch C., (2014), Higher Bank Capital Requirements and Mortgage Pricing: Evidence from the Counter-Cyclical Capital Buffer, Working Paper No. 169,
- Calem P. S., (2011), Risk-based Capital Requirements for Mortgage Loans, Washington University in St. Louis,
- Feschijan D., (2008), Analysis of the creditworthiness of bank loan applicants, Facta Universitatis, Series: Economics and Organization Vol. 5, No 3,
- Goodman L., (2017), Quantifying the Tightness of Mortgage Credit and Assessing Policy Actions, Urban Institute,
- Hoebeeck A., Inghelbrecht K., (2017), The impact of the mortgage interest and capital deduction scheme on the Belgian mortgage market, NBB Working Paper No. 327 - September.
- Mosser P. C., Tracy J., Wright J., (2013), The Capital Structure and Governance of a Mortgage Securitization Utility, Federal Reserve Bank of New York Staff Reports,
- Sassen S., (2008), Mortgage capital and its particularities: a new frontier for global finance, Journal of International Affairs, Vol. 62, No. 1, Global Finance (Fall/Winter).
Author: Sara Pilch