The Turkish residential mortgage market has grown significantly over the last few years mainly driven by falling interest rates. The New Mortgage law that passed in March 2007 further strengthened the legal background for both primary and secondary market triggering a sudden increase in the mortgage product variety. While there were only a few mortgage products before the new mortgage law, currently there are more than 20 different mortgage products for consumers.
However, the fast growth in the market has not been absorbed by the general public. Surveys show that more than 50% of the people don’t have sufficient understanding of the new mortgage system. Moreover, most people have the perception that the new mortgage system is a miraculous system that will let them buy houses without any savings and with very low monthly payments. This article addresses some of the misconceptions and draws attention to the reality by focusing on the real costs of mortgages.
Length of Loan and Interest Rate Relation: While some banks have started to offer mortgage loans up to 30 years in Turkey since the new mortgage loan passed in March 2007, currently the mortgage rates in Turkey are too high to get a loan with loan length of longer than 10 years. The consumers would be better off with loans less than 10 years.
To demonstrate the irrationality of getting a loan with a length of more than 10 years a simple comparison of monthly payments in a few cases will be sufficient. When monthly interest rate is around 1.30% for most banks, as it is in November 2007, monthly payment of only 2-year loan would be 4,877 New Turkish Lira (YTL). Extending the length of the loan to 10 years, would decrease the monthly payments to 1,650 Turkish Lira, a 82% reduction in the monthly payment. While 82% reduction in monthly payments is significant by extending the length of the loan by 8 years, a further extension in the length of the loan does not decrease the monthly payment significantly. For example, if the length of the loan is assumed to be 20 years, the monthly payment will decrease to 1,361 YTL, an additional 18% reduction from the monthly payment in one-year loan. So increasing the length of the loan an additional 10 years decreases the monthly payment by only 18% more. Even more interestingly, for 30-year loan, the monthly payment decreases to 1,313 YTL, an additional 4% reduction in the monthly payment for another extension of 10 years in the loan.
Let’s note that if the interest rates were lower, the optimum point for length of loan would be more than 10 years. For example, if the monthly interest rate were 0.5%, the reduction in the monthly payments would be 87%, 35% and 16% for 10 year, 20 year and 30 year loans respectively (as opposed to 82%, 18% and 4% with 1.3% monthly interest rate). Similar length of loan comparisons can be computed with a mortgage payment vs. length of loan comparison calculator.
Cost of the loan: Interest rates, commissions and fees
The most important thing consumers should do is calculating the real cost of the loan. The cost of loan includes the interest rate, expertise costs, insurance costs and most importantly, fees and commissions.
While interest rates of the banks are usually available on their web pages, most banks do not choose to publicize the commissions and fees upfront. There are cases when consumers apply for mortgage and goes through all the paperwork without any clue about the fees up until the last steps. Since it is usually known that fees are overlooked by the consumers, some banks offer low interest loans with significantly higher fees, which turn out costlier than the high-interest loans. Such incidents can be avoided if the consumers search internet for the mortgage costs. Kredihavuzu.com provides comprehensive information about the mortgage costs for every bank. Effective interest rates should be calculated to compare the real costs of the loan across different mortgage products with fees included in the costs.