Financing the purchase of your new home

In previous housing-related articles, we have examined the pros and cons of buying property in Belgium, how to go about buying your own home and the advantages of funding your purchase with the aid of borrowed funds. This article outlines the different loans available and borrowing strategies within the context of overall personal financial planning.

Traditional mortgage loans

The mortgage market has changed markedly since the onset of the financial crisis in 2007. Banks are under pressure to deleverage – in other words, to reduce the percentage of loans they offer relative to the money they hold from savers. As interest rates are close to zero and below the rate of inflation, banks are finding it hard to attract and keep savers’ funds, so they are becoming extremely reluctant to lend unless they can persuade the potential borrower to buy other bank products. With unattractive bond and deposit rates combining with stock market fears and unemployment concerns, these are tough times for banks.

Shopping around

Comparing mortgages can be tricky in Belgium due to the obligation to buy other products to receive a bank’s best interest rates. The cost of these products can disguise the true cost of a mortgage loan. Typically, high street banks will insist on some or all of the following: your salary paid into an account with the bank; house contents insurance (known in Belgium as fire insurance); and mortgage protection insurance. 

This last item is particularly expensive in Belgium and you will need to negotiate to avoid having this product, which could cost tens of thousands of euro, added to your housing expenses.

Lombard credit loans

Lenders protect themselves from defaulting borrowers by taking a charge against the property being mortgaged. Alternatively, a lender can take a charge against liquid assets. This type of loan is known in Belgium as Lombard credit and is generally offered by private banks in the Benelux region.

Mortgage loans in Belgium are quite restrictive when compared to the facilities that may be available in your home country, and credit is generally more difficult to come by these days. So, if you have liquid assets, it can be advantageous to consider a Lombard credit loan. Interest rates on these types of loans can be as low as 2 percent, and when compared to mortgage loans they have a number of advantages.

•    No initial costs (mortgage loans incur ‘file’ fees running to hundreds of euro)

•    No taxes (mortgage loans taxes run to thousands of euro)

•    No redemption penalties (early redemption of mortgage loans typically incur three months’ interest penalty)

•    Interest-only payments mean improved cash flow and allow borrowers to build up funds in their own name. While the primary purpose of these funds will be to eventually clear the loan, they also provide access to emergency funds without the need to go to your bank to ask for a loan, which will be at a much higher interest rate, will incur very high monthly repayments and of course may even be declined

•    No need to buy other products from the bank providing the loan

This last point has become a particular bone of contention as banks in Belgium look to rebuild their balance sheet by extracting extra profits from their customers and prospective customers.

Financial planning

If you have substantial liquid assets, it is well worth exploring the option of a Lombard credit loan due to the substantial cost savings and improved cash flow afforded by interest-only loan payments. 

The optimal loan arrangement will vary according to personal circumstances, however, as mortgage payments on the first €100,000 or so of borrowings are tax-deductible, a combination of a traditional mortgage loan (where both capital and interest repayments are made) and an interest-only Lombard credit loan will be advantageous for many homebuyers.

It makes sense to review your finances generally when organising a home purchase, particularly if you already have other loans which could be consolidated. If you’re going to have a loan, make it a house loan. This is the only loan that can have repayments spread over decades, thereby reducing the strain on your monthly cash flow. In addition, Lombard credit and mortgage interest rates are extremely low when compared to other types of loan.