3.75% over twenty years. This is current average rate property financing. The fact remains this in no way represents the real cost which a purchaser signing under these conditions will bear. At a time when some might be tempted to jump to conclusions to avoid a possible rate hike, it is therefore important to keep a cool head on the question of the proposed tariffs.
Nominal rate
The rates that the banks propose are so-called nominal rates. They are used to determine the monthly payments. For example, a loan of 200,000 euros over twenty years at a nominal rate of 3.75% results in a monthly payment of 1,185.78 euros.
But knowing the real monthly payment is there other settings must be integrated such as fees or insurance.
Impact of Fees
If the bank charges 2,000 euros of handling fees financed on credit, the buyer must actually borrow 202,000 euros. With a rate of 3.75%, the corresponding monthly payment will therefore rise to 1,197.63 euros.
However, the buyer will in reality “only” have 200,000 euros available for his purchase. In summary, he has to pay 1,197.63 euros per month to achieve 200,000 euros. However, by doing the reverse calculation, the corresponding rate is no longer 3.75%, but 3.86%.
Impact of insurance
We can go even further by integrating insurance. If it is 0.4% per year, in our example it will add 66.67 euros every month, bringing the monthly payment to 1,264.30 euros.
Paying 1,264.30 euros per month to obtain a net financing of 200,000 euros thus corresponds to a real interest rate of 4.49%.
The concept of APR
As this example shows, it’s important to consider various fees and insurance in your comparisons. The rate integrating these parameters is called APR (annual effective interest rate). It is also notified by the bank for each proposal, but be careful to check if it includes all costs (including optional costs).
In any case It is not uncommon for an offer with an attractive nominal rate to end up being more expensive than the competition due to higher administration or insurance fees.
Of course, anyone can evaluate their APR using a financial calculator or spreadsheet (with the “rate” function). To do this, it is enough to compare in the parameters the capital actually provided and the total monthly payment.
Finally, even if you are not comfortable with calculations, know that it is easy to compare two competing offers. For the same capital requirement and the same loan term, the offer that shows the lowest total monthly payment will necessarily be the cheapest on an APR basis… even if its nominal interest rate is higher.