What is the difference between a personal loan and a mortgage?

Differences between a mortgage and a personal loan

Thinking of buying a house? Although a mortgage loan is perhaps the most obvious financing option, there are other alternatives, depending largely on the capital we need to raise. If we don't need that much, a personal loan might be a better alternative. While banks have lowered the minimum amount available through a mortgage, they still tend to be at least €50,000 to €80,000. And in all likelihood, the bank will say no if we attempt to apply for a mortgage below this threshold.

Also, when applying for a mortgage, we will need to come up with roughly 30% of the amount of the property out of our own pockets: 20% to cover the part of the price that the bank will not finance, plus a further 10% to 15% in expenses. If we do not have this amount of upfront capital, there is no next to no chance of getting a mortgage.

And what about a personal loan?

Once again, the amount will be a determining factor, since banks will be unwilling to lend more than €50,000 to €75,000. In addition, repayment schedules on consumer loans tend to be less flexible, with terms of around eight to 10 years.

Differences between a mortgage loan and a personal loan – amounts and duration

So, loan or mortgage? As always, we will need to weigh up each option carefully and evaluate each factor involved in reaching a decision. The first of these is the amount we intend to ask for. As we just mentioned, if we need more than €80,000 or more than eight to 10 years to repay the loan, then our best option will be a mortgage loan. If we need less than €80,000, then perhaps the best option would be a personal loan. Remember, though, we will have less time in which to pay it back.

Differences between a personal loan and a mortgage loan – costs and fees

When it comes to costs, it is important to remember that mortgages are pegged to the Euribor and when this benchmark is low, a mortgage will offer a much lower interest rate than a consumer loan (we are talking about nominal interest rates of around 2% to 3% for a mortgage, compared to 5% to 8% for a personal loan). However, a mortgage comes with various additional costs (arrangement and appraisal costs, the fees charged by the notary and management agency, plus taxes). These costs can be as much as 10% of the value of the property, which is considerably higher than the fees we would be paying if we applied for a loan (arrangement and appraisal fee, brokerage costs, etc.). In this case, the costs might reach €300, although it will depend on each case.

As for the interest rates involved, mortgages are based on nominal interest rates (NIR), while loans feature an annual percentage rate (APR). A NIR is a fixed percentage we pay to the bank for lending us the money. An APR, meanwhile, is based not only on the NIR, but also on the frequency of payments, the bank fees and the expenses that the transaction generates. It is important to know the difference between these two interest rates, as it is the percentage of the cost of the loan and is calculated on the basis of the NIR, fees and transaction costs.

Personal loan vs. mortgage loan when buying a property – paperwork and other formalities

One of the biggest differences between a personal loan and a mortgage loan is the paperwork or legwork involved. Although this may not be the most important factor affecting our decision, it can mean the difference between a relatively fast process and a slow, drawn-out application.

When applying for a personal loan, everything is much quicker, especially if we are not asking for that much. We simply apply for the loan, pop into the branch to sign the contract and then receive the deposit in our account. It's all fairly straightforward and requires little in the way of paperwork: proof of salary, employment contract and personal data. However, if we are asking for more than €30,000, we will also have to sign before a notary and the costs will be higher (the notary will charge 0.3% of the amount we are asking for).

A mortgage, on the other hand, requires additional paperwork: property valuation and filing at the Land Registry, negotiation of interest rates and related products with the bank, appointment with the notary, payment of stamp duty, etc.

Ultimately, it is a decision that requires careful thought. The good news is that we have different options depending on our circumstances, though it is always a good idea to run some numbers through a mortgage simulator.

Last but not least, what is a home equity loan?

This third type of financing option is where we obtain a loan to purchase something other than a home (i.e. a car, a home renovation project, etc.) and offer our home as collateral. In this case, the interest we pay and the other terms and conditions are more akin to those of a personal loan; the lender will not ask us to arrange additional products and we can apply for the loan even if we are on a list of defaulters.