Mortgages, car loans

What is a mortgage

A mortgage loan is a loan to buy or build a home that is secured by the property. Usually the buyer pays only part of the price from their own funds, and the bank finances the rest. Until the loan is repaid, the property is pledged to the bank: if the borrower stops paying, the bank has the right to enforce its claim against it.

A mortgage is often simply called a “home loan”, but strictly speaking these are different things: the loan is the money you receive for a period of time, while the mortgage is the pledge of the property that secures its repayment.

Down payment and loan amount

Banks almost never finance a purchase in full: the borrower needs a down payment from their own funds, most often at least 10–20% of the property’s value. The exact amount depends on the bank, the country and your situation. Some countries, including Latvia, have state support programmes that help certain groups — for example, families with children — get a mortgage with a smaller down payment.

The loan amount depends on two things. First, on the value of the property as determined by an independent valuer: the bank lends up to a certain share of this valuation. Second, on your income: after the monthly payment, you must have enough money left for your usual expenses.

How a mortgage is arranged

  1. Choosing a bank and pre-approval. Compare the terms of several banks in the catalogue. The bank will check your income and credit history and tell you how much you can expect to borrow.
  2. Choosing a property and valuation. Once you have found a suitable property, an independent valuer assesses it.
  3. Signing the contracts. You sign a loan agreement with the bank and a purchase agreement with the seller.
  4. Registering the mortgage. The ownership right and the mortgage in favour of the bank are recorded in the land register.
  5. Loan payout. The bank transfers the money to the seller, and you start making monthly payments.

Types of repayment

Annuity payments — the same amount every month. At the start of the term, most of the payment goes towards interest; towards the end, most goes towards the principal. This schedule is easier to plan.

Decreasing payments — the principal is repaid in equal parts, and interest is charged on the remaining balance. Payments are higher at first but fall over time, and the total interest paid is lower.

Fixed or variable rate

With a fixed rate, the interest does not change for the agreed period, so your payment is predictable. With a variable rate, the interest consists of the bank’s margin plus a base rate, most often Euribor, and is reviewed regularly. In Latvia, most mortgages are issued with a variable rate.

A variable rate may start lower than a fixed one, but it carries a risk: if Euribor rises, so will your payment. So when planning your budget, allow a margin in case the rate goes up.

What costs come with a mortgage

In addition to interest, take other costs into account:

  • the bank’s arrangement fee;
  • property valuation;
  • notary services, if required;
  • the state fee for registering ownership and the mortgage in the land register;
  • property insurance, which banks usually require for the entire loan term, and sometimes life insurance for the borrower.

The full cost of the loan is shown by the annual percentage rate (APR), which the bank must state in its offer.

Can you repay a mortgage early

Yes. In the EU, borrowers have the right to repay a mortgage in full or in part before the end of the term. The bank may charge compensation for early repayment, but the amount is limited by law and by the contract. Such compensation most often applies to fixed-rate loans. The exact terms are set out in the loan agreement.

What to do if you can’t pay

If you fall behind, the bank charges penalties, and if payments stop for a long time it may enforce its claim against the property. If the proceeds from the sale are not enough, you will most likely have to repay the remaining debt. So at the first sign of difficulty, contact the bank straight away: you can often agree on a temporary payment reduction or a new schedule. Avoiding contact with the lender is the worst thing you can do.

Car loans

What is a car loan

A car loan is a purpose-bound loan to buy a car, motorcycle or motorhome. It can only be used for the vehicle, which usually serves as collateral. Thanks to the collateral, the rate on a car loan is often lower than on a consumer loan, which can be spent on anything. The loan is repaid in monthly instalments over an agreed term.

The terms of a car loan depend on:

  • the value and age of the car;
  • the size of the down payment;
  • the loan term;
  • your income and credit history.

Some contracts include a large balloon payment at the end of the term: the monthly payments are lower, but at the end you have to repay a substantial sum — at once or with a new loan. It is worth taking this into account in advance.

When a car loan makes sense

A car loan makes sense if you really need the car, your savings are not enough, and your income allows you to make the payments with confidence. Take into account not only the loan payment but also the running costs: insurance, fuel, maintenance and taxes.

If you are choosing between dealer financing and a bank loan, compare the total cost. Sometimes a dealer offers a low rate, but the car price is then higher than if you paid with money borrowed from a bank.

Car loan or leasing

Leasing is the most common way to finance a car in Latvia. There are two types:

  • Finance lease. The car is registered to the leasing company, while you use it and make the payments. After the final payment, the car becomes your property. In essence, this is close to a car loan, but until the end of the term you cannot sell the car without the leasing company’s consent.
  • Operating lease (rental). You pay for using the car for an agreed period, then return it or buy it out at its residual value. The monthly payment is usually lower, but there are restrictions — for example, an annual mileage limit, with extra charges if you exceed it.

Both leasing and car loans usually require a down payment, and leasing companies generally require comprehensive (KASKO) insurance for the car. Read the contract carefully: check who pays for insurance, maintenance and tyre changes, what fees apply and whether the contract can be terminated early.

You can find lenders offering car loans and leasing in the catalogue section “Car loans”, and lenders in other countries in the “Loans in Europe” section.

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