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When you decide to buy a home, it is very common to require a bank loan to make it possible. Although most people believe that a mortgage is the only type of loan available for purchasing a property, it is also possible to finance a home with a personal loan. In both cases, whether you opt for a mortgage or a personal loan, you will need to pay interest, but the main differences lie in the amount you can borrow and the repayment period.If the amount you need to buy the property is not very high, a personal loan can be a very attractive alternative. Banks may not approve a mortgage for a low amount, and to obtain a mortgage, you generally need to have around 30% of the property’s value saved. Let’s look at the pros and cons of both financing options to help you decide which is best in your situation.
What Is the Difference Between a Personal Loan and a Mortgage?
A personal loan or personal credit is a sum of money the bank lends you to be repaid in instalments with interest. If you are unable to repay, the bank may seize your present and future assets. Personal loans are typically used for buying a car, funding studies, or starting a business, among other purposes.A mortgage loan is requested when you cannot pay the full price of a property upfront. The bank advances you the money and you repay it in instalments with interest through a mortgage agreement. If you are familiar with what a bank guarantee is, you will know that in this type of loan, collateral is essential and includes not only your assets but also the property being financed. If you cannot repay the loan, the bank can take ownership of the property and sell it to recover the debt.The most significant differences between a mortgage and a personal loan are:
- A personal loan has a shorter repayment period than a mortgage.
- Mortgages generally offer a lower interest rate than personal loans.
- The set-up costs are higher for mortgage loans.
- The monthly instalment is lower for mortgages, so the terms of personal loans are usually stricter.
- The process is simpler and faster for a personal loan than for a mortgage.
It is also important to mention a third type of loan: the personal loan with mortgage collateral. This is a personal loan used to acquire an asset that is not a property, but the borrower uses a property as security. In the event of non-payment, the bank can exercise its rights over the property. This type of financing is usually requested for larger amounts that are not typically granted with standard personal loans.
When to Buy a Home with a Personal Loan
Although it is not the most common option, it is possible to buy a property with a personal loan. You must consider that the bank must be willing to lend you a significant sum, and monthly payments will be higher than with a mortgage. This is mainly due to higher interest rates and the fact that the repayment term is shorter.To decide whether to buy a home with a mortgage or personal loan, you should calculate your monthly payments and the set-up costs for each type of loan. Additionally, some banks require this approach, as they do not grant mortgages for amounts below a certain threshold.It is more common to apply for a personal loan to cover the costs associated with a mortgage, which are typically between 10% and 15% of the property’s value. These costs may include agency fees, notary fees, valuation, land registry, and Stamp Duty.In summary, to decide whether a mortgage or a personal loan is more suitable for buying a home, you need to consider the total property price and the repayment period you can manage.
Advantages of a Personal Loan
Personal loans offer a range of advantages compared to mortgages when financing a property:
- They allow you to borrow smaller amounts, making them ideal if you have savings and only need limited financing to complete the purchase.
- With shorter repayment periods, even though monthly payments are higher, you can settle the debt in less time.
When Is It Better to Apply for a Mortgage to Buy a Home?
When applying for a mortgage, one of the main requirements is to know exactly how much you need to borrow and the repayment period you can commit to. It is better to apply for a mortgage to buy a home when you need a larger loan and want lower monthly payments. Additionally, banks usually set a minimum mortgage amount, typically between €50,000 and €80,000, and you will need to have around 30% of the property’s value saved to apply.
Advantages of a Mortgage
The main advantages of a mortgage compared to a personal loan for financing a property are as follows:
- You can borrow larger amounts of money.
- With longer repayment terms, monthly payments are smaller and easier to manage.
- The interest rates on mortgages are generally lower than those for personal loans. It is important to remember that the Euribor for mortgages is the reference value used to calculate the interest rate for these loans.
Apply for Your Mortgage with GILMAR
GILMAR offers you all the advice you need to help you choose the most suitable type of loan and answer all your questions when purchasing a property. Having the support of real estate experts is essential, as they will consider your needs and personal circumstances to recommend the best payment method for your property. Apply for your mortgage at the GILMAR Mortgage Centre in just 5 steps. We guarantee you the best information on your mortgage loan, with no obligation and completely free of charge.
