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Almost half of the cost of mortgage loans is interest and insurance

Insurance and interest account for almost half of the total cost of the mortgage loan, which is also made up of operating expenses. You have to look at the sum of these costs. Lien and fire insurance with

  • Fixed-rate interests have differences of almost 70% and variable or fixed rates of up to 319%.
  • As part of the permanent monitoring of the credit market, SERAC wanted to find out how much it costs a consumer to finance a home to guide this critical purchase.

What to look out for?

  • The cost of credit is capital, interest, and commission, plus the cost of insurance and operating expenses. On average, most of what the consumer pays over the money they requested is made up of interest (36%), insurance (7%), and operating expenses (1%). Therefore, it is worth requesting a quote and comparing by looking at the sum of these items.
  • However, it is not enough to look only at interest to make the best decision since the institution with the lowest interest does not necessarily have the most convenient total cost. The final price will depend on the type of rates (variable, fixed, or mixed), the cost of insurance, taxes, operating expenses, etc.
  • For example, as we see in the following table, Banco Bice reports an interest rate of 5.9%, lower than that of other entities exceeding 6%. However, when considering the total cost over 20 years, Banco Bice’s product is more expensive than the alternatives.

Interests

  • The market offers mortgage loans with fixed, variable, or fixed interest rates.
  • The interest rate does not change during the agreed term in fixed-rate loans, unlike variable-term loans, where the credit interest is fixed for the first period (1 to 5 years). It can vary depending on the economic and financial conditions that occur in the future, being able to establish a limit rate.
  • The interest rates for credits in UF are financed at a fixed rate range between 4.2% and 7% per year, representing a difference of 67%, registered values in the banking sector.
  • Meanwhile, the variable or mixed rates set for the first period fluctuated between 1.4% and 5.86% annually, or a difference of 319% registered in the banking sector.

Insurance

  • In the case of insurance (relief and fire with an earthquake) of fixed-rate loans, the differences reach up to 532%, registering a minimum of UF 0.27 ($5,697) and a maximum of UF 1.7066 ($36,007) per month.
  • While in credits in UF at a variable or fixed rate, the differences can reach up to 58%, with a minimum of UF 0.74 ($15,613) and a maximum of 1.17 ($24,686).

Operating expenses

  • All mortgage credit includes operational expenses or costs for specific procedures (study of titles, appraisal, taxes (1), notary expenses, registration with the Real Estate Registrar, etc.).
  • There are differences of up to 85% or more than $330 thousand in these costs, with a minimum of 18.6904 ($394,345) registered in the managing agents and a maximum of 34.5 ($727,909) registered in the Banks.

 Dividend

  • Consumers who quote their mortgage credit through simulators will encounter the main difficulty of not reporting the total cost to pay.
  • However, if the exercise is made of calculating the cost of the monthly dividend for years to be paid, the fees (2) of the mortgage loans range from UF 2,428 to UF 2,999, or a difference of 24%. Namely,
  • The total monthly dividend is payable for loans in UF financed at a fixed rate, including insurance (3), registered as a minimum of UF 10.0158 ($211,322) and a maximum of UF 12.37 ($260,992), or a difference of 24%. Both costs were recorded in the banking sector.

Conclusions

  • It is not enough to look only at the dividend or what you will have to pay month after month for the mortgage loan. The final cost of the mortgage loan is made up of interest and commissions, credit and fire insurance, and operating expenses.
  • Request a quote, compare at least three institutions considering the same term, and negotiate to choose the one that gives you the best option.
  • It is not enough to look at interests. An institution with lower interest rates than another does not necessarily have a more convenient final cost.
  • Interest and insurance take almost half of the cost of the mortgage loan.
  • Fixed interest rates show differences of up to 67%, while variable or mixed rates show more than 300% differences.
  • The present insurances differences of more than 500%, for which it is convenient to quote especially considering that the insurance can be contracted directly with a company other than the one that grants the credit.
  • Operating expenses show differences of up to 85%.
  • Remember that credit and fire insurance are mandatory in a mortgage loan, and other insurance is optional.
  • Look at the insurance coverage. For example, coverage against earthquakes may be added to the fire. If you are interested in this type of insurance, review the policy well and, in addition to the price, compare what it covers and what it does not. For example, demand to know in advance the percentage of the property’s value covered by earthquake fire insurance: 80% or 90%. Note that there are differences between houses and apartments.
  • The insurance policy must clearly explain the coverage, the cost, the deductible, what the consumer will have to pay once it becomes effective, and the restrictions.
  • The property’s price, the payment methods, the possibility of repayment of the debt, the interest rate, and the term agreed for the credit must be established in the contract of sale, and look at the number of dividends.
  • Consider that purchasing a home is a significant investment, so it should not be left only for gifts or offers.

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