How a mortgage works (the French system)
In Spain almost every mortgage uses the French amortization system. Its main feature: you pay a constant monthly payment for the whole life of the loan (as long as the rate doesn't change). What does change, month by month, is how much of that payment goes to interest and how much repays principal.
The payment: one formula, a fixed result
The monthly payment comes from this formula:
Payment = C × i / (1 − (1 + i) ^ −n)
where C is the borrowed capital, i the monthly interest rate (the annual rate divided by 12) and n the number of months (years × 12).
Example: €150,000 at a 3 % nominal rate over 30 years (360 months). The monthly rate is 0.03 ÷ 12 = 0.0025. The resulting payment is about €632/month.
Why you pay mostly interest at first
Each month, interest is charged on the capital you still owe. At the start you owe almost everything, so most of the payment goes to interest and only a small part repays principal. Over time the debt falls, the monthly interest falls and you repay more and more principal.
Here are the first months of the example (payment ≈ €632.41):
| Month | Payment | Interest | Principal repaid | Outstanding balance |
|---|---|---|---|---|
| 1 | €632.41 | €375.00 | €257.41 | €149,742.59 |
| 2 | €632.41 | €374.36 | €258.05 | €149,484.54 |
| 3 | €632.41 | €373.71 | €258.70 | €149,225.84 |
In month 1, of €632 you pay €375 in interest and only €257 in principal. Near the end it will be the other way around. This full table is called the amortization schedule.
Principal vs. interest over the life of the loan
- Early years: interest dominates. So if you plan to sell or repay early, doing it soon saves far more interest.
- Late years: principal dominates. You pay almost no interest by then.
- Total: in the example, over 30 years you would pay about €77,700 in interest on top of the €150,000 borrowed.
Nominal rate (TIN) vs. APR (TAE): don't mix them up
- TIN (nominal interest rate): the "pure" rate of the loan. It is the one used to compute the payment. It does not include fees or costs.
- TAE (APR, annual equivalent rate): includes the nominal rate plus fees, some costs and the payment frequency. It reflects the real cost better and lets you compare offers between banks.
Rule of thumb: use the nominal rate to understand the payment and the APR to compare mortgages with each other. The APR is always equal to or higher than the nominal rate.
Note: the APR of a variable-rate mortgage is only an estimate, because the rate will change with the Euribor over time.
Concepts you'll see when signing
- Fixed / variable / mixed rate: fixed never changes; variable is reviewed against the Euribor; mixed starts fixed and later becomes variable.
- Early repayment: paying extra principal. You can reduce the payment (pay less each month) or the term (finish sooner and save more interest).
- Tie-ins: products (insurance, salary deposit) that lower the rate in exchange for taking them out. Always check the APR with and without tie-ins.
Common mistakes when signing
- Looking only at the payment. A low payment over 35 years can hide tens of thousands of euros more in interest than a slightly higher one over 25 years.
- Accepting tie-ins without doing the maths. A "mandatory" home or life insurance to lower the rate sometimes costs more than it saves. Always compare the APR with and without tie-ins.
- Choosing variable just because it pays less today. The Euribor rises and falls; compute the payment under a rising-rate scenario before signing.
- Forgetting the set-up costs (you pay for the appraisal) when estimating the cash you need upfront.
What to do with this
Always ask for the APR to compare between banks and the full amortisation schedule to see how much interest you'll pay in total. If you have spare cash in the early years, prepaying saves the most, precisely because interest weighs more at the start. And before buying, test the decision against the buy vs rent guide.
Educational information, not financial advice. Review the specific terms of your loan before signing.