NOTE: For those interested in obtaining a mortgage in Turkey: You’ll need either Turkish citizenship or a legal asset that can be verified by the bank. Foreigners who don’t meet these criteria may find it not possible to secure a mortgage.
Introduction:
“An investment in knowledge pays the best interest.” – Benjamin Franklin
A major part of a real estate agent’s job is to educate clients about the home buying and selling process. For clients who have bought or sold homes before, the process may be familiar, and they might just need a refresher. On the other hand, some clients might be going through this for the first time and will need more detailed explanations and support.
For example, new clients might not understand basic real estate concepts like “mortgage” and may wonder, “What does ‘mortgage’ mean?” It’s important to provide clear and simple explanations to help them grasp these essential terms and steps.
What Is a Mortgage?
A mortgage is a special kind of loan used to buy real estate, like a house or land. It’s a secured loan, which means the property you’re buying acts as collateral.
In Turkey, a mortgage is essentially a legal agreement, and it's important to understand that its terms are governed by Turkish Contract Law.
This means if you miss payments, the lender can use their mortgage rights to seize the property and sell it according to Enforcement and Bankruptcy Law to recover the outstanding debt.
—Turkish Civil Code; Purpose and Nature Article 881 – Any existing debt or a debt that is certain or probable to arise in the future, even if it has not yet arisen, can be secured by a mortgage. It is not necessary for the immovable property to be owned by the debtor to be subject to the mortgage.---
In brief, mortgages let people buy homes without paying the full price all at once, making homeownership more accessible.
Key Mortgage Points Buyer Needs to Know
Buying a property is a major financial commitment, and it's essential for your buyer to understand these crucial mortgage details:
1. Ownership vs. Lender’s Claim
When the buyer takes out a mortgage, he becomes the owner of the property. However, the lender has a legal claim on the property until the mortgage is fully paid off. If payments aren’t made as agreed, the lender can start foreclosure to recoup the loan by selling the property.
2. Additional Costs
Beyond the monthly mortgage payment, which covers both the loan’s principal and interest, there are other costs to consider. Buyers are also responsible for property taxes and homeowner’s insurance. These can often be included in the monthly mortgage payment, so it’s important to budget for them.
3. Understanding Before Closing
While these details will be reviewed at the closing appointment, it’s crucial for buyers to grasp them beforehand. Knowing what to expect helps avoid surprises and ensures a smoother home-buying process.
The basic components
-Property: This is the actual home or real estate you’re buying with the mortgage.
-Mortgage: Think of this as the lender’s way of securing their investment in your property. It means they have a financial claim on the property, which might come with certain rules about how you can use or sell it.
-Borrower: This is you, the person taking out the mortgage and gaining ownership of the property.
Lender: This is usually a bank or a financial institution that provides the loan for your property.
-Principal: This refers to the initial amount of the loan you take out. It might not cover extra costs, which could be added separately.
-Interest: This is the cost you pay for borrowing money from the lender. It’s essentially the fee for using their funds.
-Foreclosure or Repossession: If you don’t keep up with your mortgage payments, the lender might have to take legal action to reclaim the property.
-Completion: This is the legal process where all the paperwork for the mortgage is finalised, officially transferring ownership.
-Redemption: This is when you pay off the remaining balance of your mortgage, clearing the debt and fully owning the property.
How Mortgages Work?
Here’s a simple breakdown of how mortgages work and what your client needs to know about their home payments:
1.Down Payment
In Turkey, the borrower usually makes an initial payment called a down payment, which is typically around 20% of the property’s purchase price. While it’s possible to get a mortgage with a smaller down payment, the borrower might need private mortgage insurance (PMI).
2. Loan Amount
The lender covers the remaining cost of the property, known as the loan’s “principal.” The lender will evaluate the property’s value and won’t allow borrowing more than what the property is worth.
3. Interest Rate
The borrower pays back the loan with interest, which is the cost of borrowing. It’s important for the buyer to understand the total cost, which includes both the principal and interest. For example, on a $250,000 home with a 30-year mortgage at a 43% fixed interest rate:
Monthly Payment: $9,083.28
Total Interest Paid: $3,019,584.80
Total Cost Over 30 Years: $3,269,584.80
This means the buyer will pay $3,019,584.80 in interest over the life of the loan, making the total cost of the home $3,269,584.80.
4. Term of the Loan
The borrower repays the loan over a set period, usually between 15 and 30 years, with regular monthly payments covering both principal and interest. Over time, more of the payment goes toward the principal, and less goes toward interest. This process is known as amortisation.
Types of mortgages available in Turkey
-Fixed-Rate Mortgage
With a fixed-rate mortgage, your interest rate and monthly payments stay the same throughout the loan term. This type, often called "fixed-rate" or "traditional," is ideal for those who want stability and predictability in their monthly budget.
-Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage starts with a fixed interest rate for an initial period. After this period, the rate can change based on market conditions. While there are caps on how much the rate can increase at a time and over the life of the loan, rising rates could lead to higher monthly payments, making budgeting a bit more challenging.
-Interest-Only Loans
Interest-only loans allow you to pay just the interest for a certain period, which can lower your monthly payments initially. However, once this period ends, you’ll need to start paying off the principal as well, which can lead to a significant increase in your payments. These loans are more complex and are best suited for borrowers who are comfortable with higher financial risks.
-Developer Mortgages
Some property developers offer their own mortgage plans, which might be more flexible than traditional bank loans. These can be an attractive option, especially when purchasing new or off-plan properties. However, terms and conditions can vary widely between developers, so it’s crucial to review them carefully. Be aware of potential risks, especially if the property is still under construction.
What Should You Look for When Comparing Mortgages?
Choosing the right mortgage involves more than just picking a low interest rate. Here are some key features your clients should compare to find the best deal:
1. Loan Term
The loan term is how long a borrower has to repay the mortgage, usually between 15 and 30 years. Shorter terms mean higher monthly payments but less total interest paid over the life of the loan.
2. Interest Rate
The interest rate is a major factor in the overall cost of the mortgage. Rates depend on various elements, such as the borrower’s credit score, the size of the loan, and the down payment, as well as broader economic factors like inflation and central bank policies. Sometimes, borrowers can pay extra fees, known as "points," at closing to lower their interest rate.
3. Closing Costs
These are the additional expenses involved in finalising a mortgage, including appraisal fees, title insurance, and loan origination fees. These costs are generally paid when the loan closes.
By understanding these key aspects, borrowers can make informed decisions that align with their financial goals and situation.
Mortgage Interest Rates in Turkey
In Turkey, mortgage interest rates vary depending on the currency and your financial situation:
The average interest rates of housing bank loans in Turkey fluctuated during the period from June 2015 to March 2024. The highest average interest rate was seen in the last week of March 2024 and amounted to over 43.53 percent.
For the best deal, it’s often advisable to choose a mortgage in the same currency as your income. This is especially relevant for foreigners earning in currencies like USD or Euro, as banks offer loans in these currencies to match your income.
How to Secure a Mortgage for Buying Property in Turkey
Planning to finance your property purchase in Turkey? Follow these simple steps:
1. Consult with Experts
Start by talking to Right Home, a trusted real estate consultancy, to find out if you qualify for a mortgage.
2. Select Your Property
Choose the property you want to buy. This will be the basis for your mortgage application.
3. Get a Valuation Report
Obtain a valuation report for your chosen property. This report helps determine how much you can borrow.
4. Complete the Mortgage Application
Fill out the mortgage application form with all the required details.
5. Submit Your Documents
Provide the necessary documents to support your application.
6.Loan Offer: The lender approves your application and provides you with a particular loan amount and interest rate.
7. Closing and Sign the Mortgage Agreement
Complete the transaction by making the down payment, signing loan paperwork, and transferring ownership of the property.
With these steps, you’ll be on your way to securing a mortgage and owning property in Turkey.
Essential Documents for a Mortgage Application in Turkey
- Property title deed (Tapu)
- Notarized copies of your passport
- Turkish tax number
- Proof of address (e.g., utility bill for electricity or water)
- Bank statements from the past three months
- Payroll statement signed by your employer (if employed)
- Financial records showing at least two years of self-employment history (if self-employed)
- Retirement letter (if retired)
- Official document certifying personal assets and debts
- Credit registration bureau record from your home country
- Signed mortgage application form
Advantages of Having a Mortgage
Here are some benefits of using a mortgage to buy a home:
- Achieving Homeownership: With a mortgage, you can buy a home without needing to pay the full price all at once. This makes homeownership more attainable for many people.
- Building Equity: As you make mortgage payments, you gradually build equity in your home. This increases your net worth as you own a larger share of the property over time.
- Tax Benefits: Mortgage interest payments can often be deducted from your taxable income, potentially lowering your tax bill and saving you money.
- Potential for Appreciation: Real estate usually appreciates in value over time. Owning a home with a mortgage can enhance your wealth as property values rise.
- Forced Savings: Regular mortgage payments act as a form of forced savings, helping you build wealth over time through property ownership.
- Stability: Homeownership provides a sense of stability. You can settle into a community, customise your living space, and avoid the unpredictability of renting.
Overall, a mortgage is a powerful financial tool that offers both immediate and long-term benefits.
Disadvantages of Having a Mortgage
While a mortgage has its perks, it also comes with some drawbacks:
- Long-Term Debt: Mortgages are long-term commitments, often spanning 15 to 30 years. This means carrying a significant amount of debt for a large part of your life.
- Interest Costs: Over the life of the loan, the total interest paid can greatly increase the overall cost of the home, sometimes doubling the amount you initially borrowed.
- Risk of Foreclosure: If you fall behind on your payments, there’s a risk of foreclosure, which could lead to losing your home.
- Upfront Costs: Securing a mortgage involves various upfront expenses, such as down payments, closing costs, and fees, which can be quite substantial.
- Property Value Fluctuations: Real estate markets can be unpredictable. If property values drop, you might owe more on your mortgage than the home is worth, a situation known as being “underwater.”
- Financial Pressure: Committing to regular mortgage payments can add financial stress, particularly during economic downturns, job losses, or unexpected expenses.
- Additional Costs: Beyond the mortgage payment, homeowners must also cover property taxes and insurance, which can add to the overall cost of owning a home.
While a mortgage can make owning a home possible, it's important to weigh these financial risks and responsibilities carefully.
Conclusion:
Mortgages can serve as a crucial stepping stone in your real estate career, simplifying the investment process and making property ownership more accessible. Whether you’re exploring fixed-rate stability, adjustable-rate flexibility, interest-only plans, or developer-specific options, understanding these choices helps you to find the right fit for your financial strategy and investment goals. Each type has its own advantages and potential risks, so it's important to stay informed and seek expert advice.
