Mortgages: proper preparation is half the battle

The inside track: practical information for anyone looking to take out a mortgage

It all comes down to proper preparation when buying a property. Anyone taking out a loan should obtain information in advance regarding collateral, interest rate options, loan term and any available state aid. Choosing the right partner to provide professional advice and support is also key.

On average, a flat in Luxembourg costs EUR 658,977, and a one-family house EUR 970,589. These are the figures published in August’s Observatoire de l’Habitat on the basis of current market offers. These figures confirm that buying a property is a costly step from a financial perspective. Most people buying a house, flat or plot of land can only raise the necessary funding with top-up financing, i.e. a loan. This is a project that will have long-term effects, and it needs proper preparation. It requires the right solution and the appropriate partner.

A variable, fixed or adjustable interest rate?

If a bank loan is used as financing, the household borrows money that must be repaid together with interest over a certain period of time, in theory up to 40 years. In practice, the term of the loan depends on the age and monthly budget of the borrower. In principle, monthly repayments should not account for more than one third of your regular monthly income. Professional advice is crucial when setting repayments in order to avoid overburdening the household financially.

Generally speaking, there are three specific types of loan. With a fixed-rate loan, the interest rate remains constant throughout the full term of the loan and is fixed with the bank when the loan is taken out. This means that there are no negative surprises, even during periods of rising interest rates. But there is a price to pay for this. The agreed fixed rate is generally somewhat higher than is the case for a loan with a variable interest rate. A variable rate means that interest rate fluctuations will be reflected in the interest payable on the loan. Monthly repayments will be adjusted for such fluctuations and will therefore vary from month to month. There is therefore the risk of a loan becoming more expensive as interest rates rise. A third option is a loan with an adjustable interest rate. In this instance, the interest rate is fixed, initially for three, five or ten years. At the end of this period, the loan may continue either with a variable rate, or with a new fixed rate of interest.

There are generally four types of collateral for banks: credit protection insurance, a mortgage, salary assignment and a guarantee.

No collateral, no loan

It is not possible to get a loan without collateral. There are generally four types of collateral for banks: credit protection insurance, a mortgage, salary assignment and a guarantee.

Credit protection insurance provides cover for dependents. Upon the death of the borrower, the insurer takes over repayments on the outstanding loan to the loan provider. If borrowers do not meet their obligations, the lender has the right to foreclosure on the property. This means that the bank has a pledge, or a mortgage on the property. With a salary assignment agreement, the bank has direct recourse to the employer of the borrower should the borrower not keep up with monthly repayments. With a joint and several guarantee, a third party may guarantee to repay the debt if the borrower cannot keep up with the agreed monthly repayments.

With regards to guarantees, it’s worth bearing in mind the option of a state guarantee. Where applicable, the authorities may step in to cover part of the loan.

The file must be complete

Anyone wishing to take out a loan and to submit such an application to a bank needs to put together a file that is as complete as possible. Here too, proper preparation is half the battle. For mortgage loans, credit institutions generally require the following documents:

• a purchase agreement, a notarial deed or a draft notarial deed;
• an excerpt of the cadastral map;
• proof of capital resources (if these are not held at the relevant credit institution);
• detailed information on existing loans;
• the credit applicant’s most recent payslips;
• other documents required for the loan application and approval of the financing.

For a new building or a renovation project, the file should also include the following documents:

• a building permit;
• a construction plan;
• photos of the building (for a renovation);
• plans, specifications and/or cost estimates (for a new building).

Over time, a series of tax incentives has been introduced in Luxembourg to promote the purchase of property.

State aid

Over time, a series of tax incentives has been introduced in Luxembourg to promote the purchase of property. The applicable rules are presented below:

• interest payments on the property loan are tax deductible for the time during which the property cannot be used or rented due to construction or renovation work;
• interest payments are tax deductible, dependent on thresholds based on the number of years of occupancy of the property;
• provisions and acquisition costs in connection with the loan are fully tax deductible with some reservations (costs for the notarial deed upon acquisition of the property are excluded);
• tax benefit for periodic premiums for the credit protection insurance (together with interest on loans apart from mortgage loans) in the amount of EUR 672 per year per household member.

In addition to the measures described, the state grants various subsidies upon the construction, acquisition, renovation or conversion of homes:

• direct financial aid;
• interest subsidies for the repayment of a loan;
• incentives to improve energy efficiency;
• subsidies for systems enabling the use of rainwater;
• zero-interest “Klimabank” loans.

It’s worth exploring!