What Is the Difference Between a Home Loan and a Mortgage Loan?
When you decide to buy your own home, you will come across two terms that may sound almost identical at first glance – a home loan and a mortgage loan. In practice, however, there is a clear distinction between them, and choosing the right product depends on the purpose for which you need the funds and the property you can provide as collateral.
A home loan is generally used to finance the purchase, construction or completion of a residential property. A mortgage loan is a broader term that covers various types of loans secured by real estate.
In this article, you will learn about the difference between a mortgage loan and a home loan, and which product may be right for you.
Key Differences Between a Home Loan and a Mortgage Loan
Before choosing a product, it is important to understand exactly how these two types of financing differ. Below, we look at their main distinctions.
Purpose of the Funds
To understand what a home loan is, it is important to know that it is strictly purpose-specific. The funds are used exclusively to purchase a house or apartment and are generally transferred directly to the seller's account rather than to the borrower's account.
The question of what a mortgage loan is has a broader answer, as this category includes several products with different purposes.
Type of Collateral
The property used as collateral may be the one you are purchasing, but it can also be another property you already own. This makes it possible to use the funds for various personal needs rather than solely for purchasing a home.
Purpose-Specific and Non-Purpose-Specific Loans
A purpose-specific mortgage loan is one where the funds are intended for a particular purpose, such as purchasing a property, carrying out finishing works, financing construction or even buying a car. A non-purpose-specific mortgage loan, on the other hand, does not require you to account to the Bank for exactly how you spend the money.
How the Funds Can Be Used
A mortgage loan for purchasing a property can offer flexibility, making it a convenient choice for people who wish to finance both the purchase of a home and additional expenses, such as renovation or furnishing, through the same loan.
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Advantages of a Home Loan
The main advantage of this product is transparency, as you know exactly what every euro is being used for. The Bank transfers the funds directly to the seller, making the transaction more secure for both parties.
If you are looking for a competitively priced home loan, it is worth comparing several offers. Specific home loan terms, including the financing amount, repayment period and fees, vary depending on the Bank's conditions and the borrower's financial profile.
If you are wondering how to get a home loan, the first step is to prepare documentation relating to your income, the property you have selected and the down payment you are generally required to provide. If your goal is not simply to purchase a property but to build your own home from scratch, it is worth knowing that construction loans are disbursed in stages, depending on the progress of the construction work. This protects both you and the Bank against unnecessary risk.
For property purchases at an early stage of construction, iBank also offers the ACT 14 Mortgage Loan, specifically designed for properties at the structural completion stage. This allows financing to be provided before the final document authorising the property to be put into operation has been issued.
Advantages of a Mortgage Loan
The main advantage of a mortgage loan is its flexibility in terms of how the funds can be used, as well as the possibility of a longer repayment period of up to 30 years. In addition, the Bank offers a principal repayment grace period of up to 12 months, helping to ease the financial burden during the first months after taking out the loan.
To find a competitively priced mortgage loan, it is important to compare not only the interest rate but also management fees, insurance costs and any early repayment charges. Mortgage loan eligibility requirements generally include a stable income, a good credit history and suitable property to serve as collateral.
If you are considering applying for a mortgage loan, the first step is to consult the Bank to assess the maximum financing amount available based on your income.
Choosing between a fixed-rate mortgage and a variable-rate mortgage also has a significant impact on your long-term costs. A fixed interest rate provides security and predictable repayments, while a variable rate may change in line with market conditions, although it may initially be lower.
Risks Associated with Home Loans and Mortgage Loans
With both products, the main risk is related to the long repayment period and the possibility that your financial circumstances may change over the years.
Here are some ways to manage the main risks:
- Carefully research mortgage and home loan interest rates - even a small difference in percentage terms can have a significant impact on the total cost of the loan over its entire repayment period.
- Do not underestimate fixed fees and charges - these may include document assessment fees, notary fees, property insurance and, in some cases, account management fees.
- Calculate all associated costs realistically - consider the total expenses related to both mortgage and home loans, rather than focusing solely on the monthly instalment.
- Keep a financial buffer - set aside funds for unexpected expenses, as market interest rates and insurance premiums may change over the repayment period.
Ask the Bank for a detailed repayment schedule before signing the agreement. This will help you clearly understand how the principal and interest are allocated in each instalment and how much you will pay in total over the entire loan term.
When Is a Home Loan the Right Choice?
A home loan is a logical choice when you have a clearly defined purpose - purchasing a specific apartment or house – and prefer transparency regarding how the funds will be used. It is also a convenient option when buying a property directly from a developer or previous owner and you want the transaction to be completed through a secure process overseen by the Bank.
Before applying, carefully calculate the future instalments on your chosen home loan in relation to your household income. This will help ensure that your monthly repayments do not place an excessive burden on your family budget over the coming years.
When Is a Mortgage Loan the Right Choice?
Choose this option when, in addition to purchasing a property, you are planning further expenses such as renovation, furnishing or consolidating existing debts into a single loan with more favourable repayment terms. This product is also suitable if you already own a property and wish to access its available equity for personal needs without having to sell it.
Particular attention should be paid to the possibility of claiming tax relief for young families, often referred to as mortgage tax relief for young families. Under Bulgarian law, tax relief is available on mortgage interest payments if the borrower or their spouse was under the age of 35 at the time the mortgage agreement was signed. Another requirement is that the mortgaged property must be the family's only residential property during the relevant tax year. The tax relief must be claimed through the National Revenue Agency (NRA) and is not a special condition offered by the Bank.
Before signing the agreement, prepare a detailed mortgage repayment plan and clarify the repayment schedule to ensure financial confidence throughout the entire loan term.
Frequently Asked Questions
Can I get a property loan if I already have another mortgage?
Yes, it is possible. However, before approving additional financing, the Bank will assess your total debt in relation to your income. The combined monthly instalments on all your loans must not exceed a certain percentage of your income.
Does the property I am purchasing have to serve as collateral?
Not necessarily. For certain loan products, the Bank may accept another property that you already own as collateral.
What happens if interest rates increase while I am repaying a variable-rate loan?
Your monthly instalment will be recalculated based on the new interest rate. That is why it is advisable to assess in advance how much of an increase your budget could reasonably accommodate.