Mortgage [ENG 🇬🇧]

-> Przejdź do polskiej wersji tego wpisu / Go to polish version of this post

Searching for a home (or apartment) and taking out a mortgage to buy it is a bit like the chicken and egg paradox. Without submitting a loan application to the bank and undergoing a financial analysis by the bank, you don’t really know the amount you can get, and consequently, what kind of house you can afford. On the other hand, you can’t submit such an application without already having a specific property selected and at least a reservation agreement signed with the seller (e.g., a developer). In my home-related posts, I want to maintain a somewhat chronological order of my actions, i.e., write in the sequence in which I dealt with the various stages of this process. In this case, I strongly considered whether to write a post about a mortgage first or perhaps start with one that deals with how I searched for a home on the market. As you can see, dear Reader, I decided to describe the topic of the mortgage first. I was convinced by the fact that before I started any search for my dream property, I first visited a mortgage advisor. What did that give me at this stage? Firstly, I compared my knowledge about the BK2 program with what I had gathered on my own so far (mainly from the Internet), and secondly, it allowed me to determine my approximate creditworthiness. Another matter is that the creditworthiness calculated in this way ultimately differed from what the bank calculated for me, but more on that later. The important thing is that it gave me a general idea of what I could afford.

Mortgage Advisor

Usually, I am a do-it-yourselfer, meaning I like to handle various topics on my own. I usually spend a lot of time on this because I delve into the researched subject until I feel that my knowledge in this area is truly extensive. The outcome is usually that I come out well, but I also lose valuable time in which I could be doing something completely different, and possibly more useful. However, in this case, I couldn’t afford the do-it-yourself approach because, as I mentioned in the post about the BK2 program, I learned about it quite late and had to act under time pressure so that this financing didn’t slip through my fingers. I concluded that I couldn’t do without the help of an expert who would explain everything to me and guide me through the entire process. Such an expert in the field of mortgages is a mortgage advisor. There are many services of this type on the market, and instead of reading reviews, I simply chose a person who, in one of the podcast episodes I listen to, was an expert answering questions related to the BK2 program. Through the podcast host, I contacted him, and it turned out that unfortunately, he only provides services in another city, but he has a local advisor in my city in his group. Exchange of contact information, a quick phone call, and we scheduled a meeting.

What will a mortgage advisor do for us? Firstly, he has tools that allow him to calculate an approximate creditworthiness in a simplified way. I used the term simplified because he doesn’t need very detailed data for this, only information about earnings and the overall financial situation. Interestingly, this tool is simultaneously connected to all the major banks, so the entire process is optimized to the maximum. Based on this preliminary analysis, the advisor presents specific and properly filtered offers for individual banks. Interestingly, when I went through this process, only three banks participated in the BK2 program – Bank Polskiej Spółdzielczości, PKO BP, and Pekao SA. In the coming days, mBank was supposed to join, but from the beginning, it was announced that its offer wouldn’t be very attractive (high margin and interest rates), and Santander, which turned out to have… (warning: spoiler alert) the best offer, at least in my opinion.

The second advantage of having a mortgage advisor is that he takes care of gathering absolutely all the documents needed in the loan process, including contacting the real estate office or developer’s office to extract what is needed from them. I can’t imagine handling the stage of submitting a loan application to the bank myself because it’s a ton of papers that need to be filled in with the appropriate data, then signed in designated places, and finally supplemented with the necessary attachments. In addition, the practice is that applications are submitted to three banks, so the paperwork is three times as much. Why exactly three? Because one bank is always the best, but in principle, there is never certainty that, for unknown reasons, it won’t decide to reject our application. The second bank is usually the one whose offer is the least attractive, but there is more certainty that it won’t refuse us. And the third is a kind of middle option, which, in case of anything, is an additional lifeline. Apparently, banks look unfavorably at people who submit applications to more than three banks, and it may affect the fact that, wanting to additionally secure themselves, we won’t get a loan at all.

I ended up with a post promoting the profession of a mortgage advisor, and I don’t intend to publicly recommend any of them. However, if someone needs a proven option, feel free to contact me via email. If necessary, I’ll share the contact details of my advisor or the group he works with.

Creditworthiness optimization

A good mortgage advisor will likely explain all of this during the first meeting. However, it’s a good idea to start preparing for a loan long before actually applying for one. The success of the entire process depends not only on our current financial situation (although it is undoubtedly crucial) but also on our credit history. This includes whether we’ve ever had any credit obligations (or derivatives) and how we repaid them (mainly in terms of timeliness). There is no one set of rules for this, but it is said that it’s better to have no credit history at all than to have one with debts that were not repaid on time. It also seems undesirable to have many closed and paid-off credits, as it may indicate financial recklessness. Show me your credit history, and I’ll tell you what kind of person you are. This paraphrase of a well-known saying (or proverb) seems accurate. Working on your credit history is a long-term task. Of course, don’t take everything I wrote above as a certainty. Half of what I wrote is based on things I read on the Internet (mainly financial portals and podcasts) or heard from experts/advisors, and the other half is my speculation.

And what needs to be done just before applying for a loan? The first thing is to settle all your current obligations. Yes, it’s necessary to repay all loans, even those with zero percent interest. Additionally, close all credit cards if you have any. First, settle any outstanding debt on them, and then apply for their closure. The problem is that in some banks, this process can take up to 3 months… Be prepared for the bank to make it difficult for you. Opening a new card is easy, but unfortunately, it doesn’t work the same way in the opposite direction. If you don’t have time to wait until the card is closed and need to proceed with the loan now, a good practice is to submit a request to reduce the credit limit to a minimum (the amount depends on the regulations of the bank). The result of this action is not equivalent to closing the card entirely but usually takes less time, which is better than doing nothing when time is limited. If you have a business, you cannot fall behind, for example, in social security contributions (ZUS). I don’t know much about this part, so I’ll just say that.

For all of this, I recommend using the BIK Report service. BIK, or Credit Information Bureau, is a company founded by the Association of Polish Banks and private banks, whose task is to collect, integrate, and provide data on the credit history of bank customers. It is not a state institution but is indeed trustworthy. The BIK Report itself is a valuable source of information about our credit history, including details about all our obligations and any issues related to them. The summary of such a report is a score on a scale from 0 to 100, but in my opinion, that is the least important information. The cost of obtaining such an individual report is currently 54 PLN. For those curious about how it looks, a sample report is available. I used this service twice – once when I decided to take out a loan and started preparations (cleaning up), and just before submitting applications to banks to check if all obligations and credit cards had been successfully closed, and information about it had been transmitted to the system that serves as a communication channel between banks. Interestingly, from the first generated BIK Report, I found out that I had a credit line in BNP Paribas with a (not used) limit of 4 000 PLN, which I should close before applying for a loan. It was a big surprise for me, and only after contacting the bank did I learn that it was a remnant of one of my transactions on Allegro (something like Amazon or eBay but on polish market), where I used the 0% Installments program. Well, I guess I didn’t read all the terms back then… Who reads all those regulations

After such a cleanup, everyone is ready to face the bank analyst who will assess our value. Poetic, isn’t it? Tragicomedy, the essence of capitalism.

Reality (or rather the bank) can surprise

As I mentioned earlier, when I submitted my loan application in the BK2 program, the participating banks were: BPS, PKO BP, Pekao SA, Santander, and possibly mBank, although I’m not sure about the latter because I didn’t even consider their preliminary offer. Allegedly, at that time, BPS was rejecting almost all applications for trivial reasons, so we excluded this bank from the start with my advisor. The offer from Santander was the most advantageous for me, Pekao was the safe harbor I mentioned, and PKO was the intermediate option. Interestingly, the initial creditworthiness analysis exceeded the amount I intended to borrow, and the final assessment from the banks ended with no rejections, but each of them cut several tens of thousands from the requested amount. Fortunately, not enough to prevent me from compensating by increasing my own contribution. The funniest part is that the smallest amount was offered by Pekao, which I initially considered not the most optimal but a certain option.

20 or 30-Year Mortgage

This is one of the biggest controversial topics among people discussing mortgages. Opinions are strongly divided. Some say that a good mortgage is one taken for a maximum of 20 years, supported by at least a 20% down payment, and with a monthly installment not exceeding 20% of our monthly income. The famous 20/20/20 rule. Such rules are nice, but life and the individual situation of the borrower usually verify them. If I were to express my opinion on the length of the loan period to choose, I would say the longest. Why? Choosing the right length used to be important because banks charged fees or other additional costs for early repayment. Now, regulations don’t allow it, so at any time, you can overpay the loan, thereby shortening it, or repay it entirely. You can take out a 30-year loan and pay it off in 20 if everything goes according to plan and the stars align in the right sequence. However, the reverse is not possible, i.e., taking out a 20-year loan and repaying it for an additional 10 years. In theory, it’s possible because loans can be refinanced with another loan, i.e., repaying the current loan with the next loan taken for a different (longer) period. However, that’s a bit tricky, so let’s skip that topic. In short, a longer loan period provides more flexibility and is a kind of safety net in case you stumble. On the other hand, a 30-year loan, properly overpaid and thus repaid in 20, will cost the same in the final settlement as a 20-year loan repaid in those 20 years. That’s not all. A longer period means breaking down the loan amount into more, but smaller installments. This is particularly useful at the beginning when buying a house in a developer’s condition and needing to finish it. Finishing is not cheap, and the loan must be repaid, so it’s good to have a lower installment at the beginning and then, when we recover, simply overpay. In conclusion, another reminder that everything I write here is only my thoughts, not financial advice. I believe that everyone reading this has their own common sense and can form their own opinion on this matter.

What to pay attention to in bank offers

We receive offers depending on the advisor’s working style. Mine presented me with one offer from four banks in a neat table, allowing for easy comparison, fitting on two A4 pages. Regardless of the form, bank offers have several essential elements that I’ll try to point out and briefly discuss. Of course, I won’t pretend to be an expert, so let’s take it easy.

• Loan amount – seemingly obvious, but even in my case, it’s evident that a bank’s offer may deviate from the applied amount.
• Loan period – also obvious, yet always worth checking if there are no mistakes along the way, like entering a different period (e.g., 20 instead of 30 years).
• Commission – an uncaptured cost incurred right at the beginning, when the loan is initiated. The bank states the commission as a percentage, calculated from the loan amount. For example, a 1% commission for a loan of 600 000 PLN would be 6 000 PLN. Some banks have no commission, while others set it at 0.5-1%.
• Margin – a percentage added to the WIBOR rate, determining the interest portion of the installment. In offers I received, margins ranged 1.95-2.37%, applicable after the first 120 installments (10 years) in the case of BK2 program loans, transitioning from fixed to variable interest.
• Nominal interest rate – fixed interest rate set for the next 5 years. During the BK2 subsidy period, this interest rate will be reset for the next 5 years, then changing to a variable rate based on WIBOR and the margin. In the offers I received, the nominal interest rate ranged 6.75-7.02%.
• Used WIBOR rate – as mentioned earlier, the WIBOR rate is one of the elements used to calculate the interest portion of the installment. Currently, some banks use WIBOR3M (3-month) while others use WIBOR6M (6-month). However, there are talks of replacing WIBOR with a new entity called WIRON, so significant changes may occur soon.
• Appraisal cost – for a mortgage, the main collateral for the bank is the property itself, requiring evaluation by an appraiser before deciding if it’s sufficient. Some banks require appraisal by their designated appraiser, while others allow appraisals commissioned by the borrower. The latter option is advantageous as the same appraisal can be used for multiple banks, incurring the cost only once.
• Life insurance – almost every bank requires the borrower to have an insurance policy, but the approaches and costs vary widely. Some banks provide the insurance themselves, while others require it only for the first 5 years, allowing alternative coverage afterward. Some banks permit borrowers to arrange their insurance but with defined minimum requirements set by the bank. Life insurance is usually treated as a financed cost, spread across each installment.
• Down payment guarantee – understanding this mechanism took some time. The minimum down payment is typically 20%, but what if the proportions deviate, e.g., a property worth 720 000 PLN with a 120 000 PLN (16.7%) down payment and a desired loan of 600 000 PLN (83.3%)? In theory, it’s possible through the BGK (Bank Gospodarstwa Krajowego) guarantee, which evens out the difference in proportions. This guarantee covers up to 100 000 PLN, with a security cost of 1 000 PLN. For the presented example, this cost would be proportionally calculated, e.g., 237.60 PLN for a 23 760 PLN difference. This guarantee is a non-financed cost, incurred at the loan initiation.
• Property insurance – before granting a loan, the bank assesses the real estate to determine whether the pledged asset has a value corresponding to the amount of money borrowed for its purchase. I wrote about this when discussing appraisal costs. The next step is to safeguard against situations where the asset loses value, for example, due to damage caused by a fire. This is where insurance comes in, and it is likely a requirement in all banks. The situation with property insurance is similar to life insurance for the borrower. Banks have different approaches. Some impose their own insurance, others require it only initially and then give more flexibility, while others allow borrowers to arrange property insurance independently. However, in each of these cases, the bank has its own rules defining the minimum level of protection.
• Unemployment insurance – not all banks require this type of insurance. During my initial creditworthiness assessment, only PKO BP demanded it, but it wasn’t included in the final offer.
• Bridging insurance – gradually fading, but still present in some bank offers, e.g., Santander’s. Bridging insurance temporarily raises the margin (e.g., by 0.5%) when buying a property from a developer not yet ready for ownership transfer, ensuring the bank’s security. The amount paid for bridging insurance is refunded after the proper registration.
• Account requirement in a specific bank – in most banks, not only is opening an account necessary, but loan installments are also automatically deducted from it. Some banks require the account to receive the borrower’s salary.
• Credit card – often offered as an additional product with the loan, with incentives such as a slight reduction in the interest rate.
• Early loan repayment rules – following regulations introduced some time ago, banks cannot charge any additional fees or commissions for early full or partial loan repayment.

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