The banking services market is currently very extensive. Various banks attack us with advertisements in various forms, consultants accuse us of proposals. The campaigns concerning the sale of all loans in various varieties and cash loans are always particularly intense. However, when there is a new shopping plan and we want to borrow money, the same question always appears: do you need a cash or mortgage loan? Many of us do not know which is right and, above all, what is more profitable. Let’s check what these two groups of banking products characterize.
We set a goal and choose a loan
In fact, cash and mortgage loans differ radically. And at the base of making a decision about choosing one of them should be answer to the basic question: what are we going to finance with the use of borrowed money? Here you can dispel the first doubts, because mortgage loans are always for a specific purpose, specifically for the purchase of real estate or its expansion, modernization and renovation, but in a strictly defined scope. If you want to buy new furniture or household appliances, a cash loan will be appropriate here, because these purchases are not upgrades.
Apparently, the matter is simple and you can end your reflection on the choice of the type of loan, but there are situations when this dilemma, however, remains. Imagine that the family has grown and we want to adapt the attic of your home to additional rooms. The roof needs to be warmed up, the installations from the lower level have to be raised and the floors should be screed. Then it is still necessary to put partition walls, cover the floors with panels or other cladding and finishing works. The attic is small so we calculate the cost of work for the amount of about PLN 25-30 thousand. And here the question arises, the mortgage needed, or just cash. What is more profitable and what is more convenient?
Mortgage – cheaper, but harder
What is a mortgage? First of all, it is worth remembering that the name of the loan comes from the type of collateral that the bank requires. It requires and at the same time establishes it on a real estate, which it intends to purchase, extend or modernize. What does this mean in practice? That until the mortgage is repaid, the mortgage of the house, plot or flat will be charged. If there is no repayment, the bank will automatically take over the property. A little comfortable vision, but it’s a typical “something for something”. In exchange for this condition, we get a loan on preferential terms.
As a rule, the mortgage loan is long-term and provides for the borrowing of larger amounts. Most banks offer mortgage loans for a maximum of 25-30 years. The minimum lending period is usually 5 years and it results from the profitability of the operation.
A mortgage loan is a possibility to borrow a large sum of money, but here the situation varies. Sometimes the limit starts from 50,000 PLN, but most banks grant such loans from 20 thousand. zł. The upper limit is high, in many mortgage offers the limit is even 800,000.- 1 million PLN.
Read also: Renting a flat or taking a mortgage – which is more profitable?
You can finance the purchase of certain real estate from the money obtained under the mortgage. A precise catalog of their types is defined in art. 46 § 1 of the Civil Code. The land surface, which is a separate object of ownership, and buildings or their parts permanently attached to it, are exchanged there, provided they are subject to property independent of the land. With the use of a mortgage you will buy a construction plot, but also a ready-made flat or house, expand your house or renovate your flat. However, each bank has its own list of possibilities, so you must always check it.
A mortgage loan for many people is a salvation in a difficult housing situation, without it they would never buy their own roof over their heads. Its main advantage is the relatively low cost, but it is also free of flaws.
- Own contribution . Most banks require it, and the more preferential the conditions, the higher the level of contribution. The borrower’s share in financing the purchase usually varies between 10% and 20%, with the lower threshold always requiring the purchase of special insurance. In most banks, instead of contributing in cash you can offer collateral in the form of another property, but in the event of problems with repayment of the loan you have to reckon with its loss. And note, the bank determines whether such security is appropriate for it.
- Additional security . Simply establishing a mortgage on a loan or other property is not everything. It is also necessary to document income, and often a third party’s guarantee, promissory note or consent to block funds on the account.
- Owibonoed and additional insurance . A bank that scorses the purchase of a property usually imposes its insurance right away. Often, we also have to decide on an additional life policy in exchange for a low interest rate on the loan.
- Complicated, long procedure . Although the new law on mortgage loans has significantly reduced these procedures, the bank still has 21 days to process the loan application. It takes a lot of time for the collection of credit security documents.
- Additional documents . In the case of our attic, a big disadvantage is that the modernization works must be outsourced to a company with building permits, which will present the work schedule required by the bank. If such expansion or modification of the building requires a building permit (eg raising the attic), it must also be delivered to the bank.
- Transfer of money . We do not have any financial resources obtained under the mortgage loan. The bank transfers them to the indicated account of the real estate seller or contractor, either in one installment or in accordance with the construction schedule presented eg by the developer. So there is no way to buy furniture, for example, because super promotions have suddenly appeared.
A cash loan for any purpose – more expensive, but easier and faster
A cash loan, in other words a consumer loan, is governed by completely different rules and, unlike a mortgage loan, all banks and credit unions offer it. First of all, you can borrow it for any purchase or for no particular purpose, for example to simply fund your home budget. Money, despite the name of the loan, does not reach us in physical form, but they are at our disposal on our account. All this means that in the case of our exemplary adaptation of a home attic, we can buy whatever we want and when we want it.
You can get a cash loan right away. Only a certificate of income is required, and often this condition is already abolished by the banks. The applicant is checked for this in the banking registers and on the basis of the information appearing there and the monthly income specified, the customer’s creditworthiness is calculated. If it is at the appropriate level, you can get theoretically up to 100-150 thousand. PLN, but most offers close to the top limit of 20-50 thousand. zł. Thus, it can be seen that a cash loan for an apartment is practically impossible. When it comes to repayment terms, it can sometimes be as long as 10 years, but in the offer of most banks we will meet 7-8 years.
Read also: How much does it cost to build a house in 2019?
Currently, in most banks the loan application is considered within 30-60 minutes, sometimes it still takes some banks one business day. Sometimes you also have to wait another working day to post the funds on your account.
Another advantage is the fact that cash loans do not require collateral from the borrower, but with larger amounts banks require a declaration of voluntary submission to enforcement in the event of problems with repayment of liabilities.
But here we have a peculiar “something for something”. For this convenience, speed and minimal paperwork and no interference in expenses, you have to pay a higher price than it is in the case of a mortgage. The interest rate on cash loans and commissions are definitely higher, so the APRC is much higher. Usually, there are no related services or an additional account, but even the cheapest cash loan can not match the least favorable mortgage loan.
Differences between a cash loan and a mortgage?
You can clearly see that these two credits differ practically everything, each is completely different. In deciding which mortgage to choose in the case of the aforementioned adaptation of a home attic, a simple statement will definitely help.
A practical glossary of terms that will surprise you when looking for a loan
In our guide you will find a few words that may surprise you also during a conversation with a bank employee. Knowledge of these terms is needed to gain full consumer awareness, but additionally to properly select a banking product.
- APR. The full name is the Actual Annual Interest Rate. The most important value in terms of loan costs. It contains all components, ie interest rates, commissions and fees, and banks are now obliged by law to provide this parameter. This allows the consumer to know the total value of the costs that accompany the commitment. It is simply the total cost of a mortgage or cash loan, it is worth remembering that the APY is a value recorded on an annual basis.
- Creditworthiness. This value is calculated by bank employees and it is in vain to inquire about the pattern or manner. Banks differ in terms of credit policy and creditworthiness also count differently. For one the revenues are more important, for others the history in the registers and the amount of current liabilities held by the client. Simply put, creditworthiness is the maximum loan amount you can apply for.
- BIK. This is the abbreviation of the name of the Credit Information Bureau, commonly referred to as the debtors’ register. There, every applicant applying for a loan is checked by a bank employee. All our current and past liabilities are in it, so you can see information about late repayments. This may make it impossible to obtain another loan, so it is worth paying your liabilities dutifully. There are other registers, but BIK is considered the most authoritative.
A moment of choice – decide which loan is better
It is high time to decide whether you choose a cash or mortgage loan to start buying and working. Enumerate costs accurately, preferably with writing to specific items. Then think about the date when you need additional resources. Consider all the pros and cons of each of the described loans, and then think about which “something for something” is more beneficial for you. We serve the guide, but you have to choose yourself, because no one better knows your needs than you do.