Financial Dictionary - Mortgage rate review
Mortgage rate review
Cadencia is when the bank reviews the interest rate payable on variable-rate mortgages. Of course this will not happen if we arranged a fixed-rate mortgage, since we will always pay the same instalment, regardless of the market performance.
Although this review is typically carried out every year, it is also possible to negotiate it with the bank. Some banks allow you to change this period from semi-annual to annual, and vice versa. In any case, we will need to inform the bank and pay the novation costs and fees associated with the change.
This review is carried out to update the index value to which the loan is referenced. In Spain, this index is typically the Euribor, which therefore determines the monthly mortgage payment. It is plain to see that this index has been steadily evolving since its introduction in 1999. These fluctuations are due to various social, political and economic events affecting markets around the world, most of which have been following a downward trend of late.
This referencing process can be performed on an annual or half-yearly basis, depending on what our mortgage deed dictates. This period will start to run from the time we sign the deed, so we will always know when the next one is coming. Once the interest rate has been reviewed, our instalment will go up or down, depending on whether the Euribor has risen or fallen.
When calculating the difference in our monthly instalment, there are four factors involved: the new Euribor, the spread applied by the lender, the amount of the mortgage and the years remaining on the loan.
And while it is true that the mortgage Euribor published by Banco de España is used to calculate our instalments, certain banks rely on the Euribor for the month prior to the review, while others look at the two, or even three, months prior to the review; it all depends on what our deed has to say.
This calculation is carried out by the bank, without us having to play any part in the process. That said, we can always use a mortgage simulator to get a better idea of the changes in store.
Cadencia (rate review) is not the same as carencia (grace or interest-only period)
While these two terms in Spanish are virtually the same, they actually have nothing to do with each other. We already know what cadencia (rate review) is. So what exactly is carencia (grace or interest-only period)? It is the temporary deferral of mortgage payments that the bank may grant us in certain cases, and which may be total (if it exempts us from paying neither principal nor interest for a certain period of time) or partial (if we only pay only interest).