Description of Bulgarian Mortgage Products

In the UK there are numerous banks and building societies that provide mortgages, and there is a vast and confusing range of financial products. The financial services sector in Bulgaria is still young, and you will find less lenders and a smaller range of products.

Introduction

Financial institutions in Bulgaria such as banks and building societies lend money to customers who want to buy property. The amount that they will lend you depends on many things, including the type of property and your income. Most banks and building societies will only lend you part of the price of the property. They expect you to pay the rest of the price from your own money. The amount of money that they actually lend to you is known as "capital".

Bulgarian Banks and building societies are not charities. They have to make a profit and therefore they have to charge you a fee when you borrow money from them. The amount that they charge is usually calculated as a percentage of the loan and is called "interest". You pay the interest in monthly instalments throughout the term of the loan.

Mortgage Products

There are 3 major groups of mortgages, these are known as repayment mortgages (or "capital and interest" mortgages), interest-only mortgages and endowment mortgages. In each case you must pay regular monthly instalments throughout the term of the loan. When choosing a mortgage product, the most important things are:

• How much of the 'capital' (the amount that you borrow) you want to pay back each month
• How much can you afford to pay each month

Repayment Mortgages

Each monthly instalment pays back part of the money that you borrowed, as well as interest on the loan. At the end of the mortgage term all the money that you borrowed has been repaid. This type of mortgage is the most popular with people who are buying their own home. As long as you pay all the monthly instalments, you are guaranteed to own the property outright at the end of the term, with no more payments to make to the lender.

Interest-only Mortgages

The monthly instalments include just the interest on the loan. None of the money that you borrowed - the "capital - is actually paid off. At the end of the mortgage term you owe exactly the same amount that you borrowed. You must then pay back the loan. This can be done by selling the property or (if you want to keep the property) by using money from an insurance policy, inheritance, etc.

This type of mortgage is popular with people who are buying a property just for investment (such as "buy-to-let") and who do not intend to live in the property. At the end of the mortgage term the property will usually be worth a lot more than the original value. As an investor you can sell the property and keep the difference between the new sales price and the loan as profit. Interest-only mortgages are also popular with first-time buyers. This is because the monthly payments are usually much lower than with a repayment mortgage.

Endowment Mortgages

An endowment mortgage is basically an interest-only mortgage combined with an endowment policy. The idea is that the endowment policy acts both as your life insurance and an investment. At the end of the mortgage term, any profit made on the endowment policy can be taken as a lump sum and used to pay off the loan. However, there is a risk that the investment might not perform well and that there will not be enough profit to pay back the loan. This type of mortgage has become unpopular in recent years because some people were sold the endowment policies without an explanation of the risk involved.

Whichever mortgage product you choose, remember that you must pay the monthly instalments. If you fail to make the payments, there is a possibility that the lender will force you to sell the property to repay the loan.

Remortgages and Equity Release Schemes

A remortgage replaces an existing home loan. It can be used to raise cash (if the second mortgage is larger than the amount that is owed) or to change to a lower rate of interest. An Equity Release Scheme involves mortgaging a property that is already owned, or part-owned, by the client. It is generally used to raise cash to pay off other loans or to buy an expensive item such a car or boat. Currently it is not possible for us to arrange remortgages or equity relase schemes on Bulgarian properties.