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Many doubts arise when talking about loans or mortgages. Not surprisingly, because the list of concepts that appear is extensive.
What if collateral, mortgage guarantee, repayment terms, interest rates applied… and a long etcetera. For this reason, it is necessary to go step by step through each of the concepts so that there is no room for error and so that we always know what we are talking about.
On this occasion we are going to talk about the mortgage guarantee and its role in mortgages.
What is the mortgage guarantee?
The mortgage guarantee refers to a loan in which a house that you own, or of which you have paid at least 80%, is used as a guarantee. In other words, what is commonly known as a mortgage.
These types of loans are usually large and their purpose ranges from starting a business to developing a large project. However, they are also common for people who are going through a bad financial moment, need liquidity and own a house. Thus, they can ask the bank for financing in exchange for putting up their home as collateral.
And yes, all this is usually formalised through a mortgage.
What is the point of mortgage loans?
For banks, these loans allow them to control credit risks in the event that they have granted a large amount of money or that the applicant’s credit rating is poor.
Thus, by having a property as collateral, they can keep it in the event of non-payment. In short, it is a kind of insurance for the lender, as the name suggests, a guarantee.
For the applicants, these loans are also interesting since, perhaps otherwise, they would not have access to this liquidity. You just have to think about buying a house. Without a mortgage, it would be impossible to do so.
Whether you want to start a business or you are going through a bad economic time, it can be very useful. In addition to using a property for a specific purpose, beyond serving as a home.
Advantages and disadvantages of a mortgage guarantee
There are several advantages and disadvantages to this type of financing.
On the positive side, for the entities that grant it, it is important to have a backing in the form of a real estate property with which to limit the credit risk and not lose all the money granted to the client.
For the applicant, the main advantage is access to liquidity that would be difficult to obtain without the property.
In addition, on the ‘pros’ side, we find that the repayment period of these loans is longer, which makes it easier to repay; it does not require a stable income; you can apply even if you are on a list of defaulters and you can continue to use the property while paying the credit granted.
The disadvantages include, on the bank’s side, that it may incur losses with this loan, despite keeping the property, or assume the subsequent process of selling the property in order to liquidate part or all of the debt. On the other hand, for the loan applicant, the main disadvantage lies in the high risk assumed, since in the event of not being able to repay the loan, the property would be lost. At the same time, the interest to be paid on this type of loan is usually higher.
In which cases can a home equity loan be applied for?
The truth is that there are situations that can lead a person to opt for this type of financing. The first of all is that it is a high amount that would not be obtained without this mortgage guarantee. That is to say, without this guarantee you would not be able to access so much money.
This is common when it comes to setting up a company or starting a project, for example. And, of course, for buying a house.
At the same time, if you are going through a difficult financial time, this type of loan can be a lifeline to get you back on track. As we have mentioned, they do not require a stable income and can be applied for even if you are on a debt collection list.
As for the requirements, the truth is that there are not many that the entities demand. You only need to be of legal age, reside in Spain and own a property that is at least 80% paid for.
How is it different from a mortgage guarantee?
Until reading the above about the mortgage guarantee, it is possible that you may have confused it with the mortgage guarantee. Although they have similarities, they also have notable differences. The mortgage guarantee is an extra guarantee that banks ask for from a mortgage applicant because they understand that there is a high risk of non-payment.
In the case of the guarantee, the guarantee requested by the entity can be material, such as a certain amount of savings or another property. But it can also be personal, when a father, mother, sibling or child is used as a guarantor. In this case, the guarantor would be responsible for the payment of the mortgage in the event of non-payment, while the mortgage guarantee, on the other hand, would never have as its purpose the acquisition of a home, whereas the mortgage guarantee has only that purpose.
