Elements of the Loan: The Amount Disbursed
One of the main elements of the loan is the amount that will be paid by the bank. From the point of view of those requesting the loan, obviously, one of the most important objectives is that this amount is sufficient to finance what is expected to be achieved, whether it is the purchase, renovation or construction of a building.
However, we must keep in mind that the amount that will be financed depends on a series of factors that should be taken into consideration, to avoid having nasty surprises when you go to the bank to apply for a loan:
- a) Value and resale of the property;
- b) Guarantees;
- c) The income of the applicant;
- d) Duration of the applicant’s mortgage/age.
Let’s see in detail the individual factors that can influence the maximum value of the amount the bank will disburse.
Value and resale of the property
As is known, the main guarantee for the bank to protect the disbursed capital is the property itself, the object of purchase or restructuring, which will be burdened with a mortgage. It is clear that, if the value of the property is 200,000 euros, the bank will hardly disburse a loan of 250,000 euros, because in the event of insolvency on the part of the borrower he would not be able to get back all the disbursed capital.
In practice, the maximum value of the amount disbursed also depends on market conditions and the level of risk that the banking system, in general, is able to tolerate at the time of the request. In times of great market turmoil and high risk taken by the banks, the entire value of the property was also financed, but apart from these particularly favorable economic conditions, it is unlikely that a bank will exceed the 70-80% share of the property’s value.
Another aspect not to be underestimated is the ” quality ” of the building itself: the presence of building abuses, for example, or a poor reliability of the building (as in the case of dilapidated buildings) could induce the bank to provide lower figures or not even granting the loan.
Notwithstanding that the main guarantee for the bank is the mortgage on the building, other forms of guarantee, for example, a guarantor able to commit in the event of the insolvency of the borrower, can be decisive, in some cases, to obtain the requested amount. This is the case, for example, of a situation in which the income of the applicant, as we will see shortly, is not congruous with the installment to be paid.
The income of the applicant
This factor must not be considered in an absolute sense, but always in relation to the amount of the installment to be paid. If, for example, an amount of € 100,000 is requested and the debt is to be extinguished in 10 years, the bank will carry out a simulation which, based on the interest rate applied, will represent the so-called “amortization plan”, with the value of the installment ( most often monthly) to be paid.
At this point the bank will check if the applicant’s income is compatible with the amount of the installment: for example if the monthly payment to be paid is 1,000 euros and the applicant’s income is 1,200 euros, the loan will be unlikely to be paid, and the bank will propose a lower amount (or longer duration).
This is because in principle the borrower, in addition to having to pay monthly the amount of the installment, with his income will also have to provide for the average needs of his family.
The type of occupation of the applicant should not be underestimated either: in general, an open-ended employment relationship offers greater guarantees to the bank than a fixed-term contract, and this can be considered for the amount of the installment deemed “fair” by the bank ( and therefore of the amount disbursed).
Duration of the applicant’s mortgage/age
By now the principle should be clear: the maximum amount disbursed depends on how much the bank considers probable that the applicant is able to pay the resulting installment. However, the latter will also depend on the duration of the loan itself.
Thus the duration of the loan indirectly influences the maximum amount that can be obtained. Finally, the age of the applicant should not be underestimated in relation to the duration of the loan chosen: an “elderly” borrower could have greater difficulty in obtaining long-term mortgages and consequently, having to lower the duration of the loan, he could be forced to reduce the amount requested.
In summary, there is a strong correlation between the different elements of the loan, from the duration to the amount of the installment, from the income of the employee to the guarantees provided, and the whole contributes to limiting the maximum amount that can be requested. The knowledge of these logics could help to reduce the surprise effect in the negotiation phase with the bank.
THE COUNCIL OF Mister Danko
The advice is to understand with the bank chosen what amount can be obtained, before venturing into the evaluation of an investment that may not be feasible afterward.