Primary or secondary residential sales market? – what will be more beneficial for the mortgage loan borrower?

This question often occurs in conversations with future apartment owners who are going to get a mortgage. Which solution might be cheaper and more convenient? In addition to the obvious issues of finishing or renovation, and apart from tax issues, there are also some differences regarding the mortgage loan.

What are the differences?

Offering mortgage loans, banks make financing of apartments on the primary market and the secondary market possible. Taking into account the markups for such loans, it can be observed that there are no differences, except for occasional promotional offers for the primary or secondary market, which sometimes might be offered  by banks. The amount of the installment for the same loan would therefore be the same. The main difference derives, however, from the starting point of financing. On the primary market, the loan is often started at the construction stage, usually long before the day the keys are collected. On the secondary market, the matter is simple – after the conclusion of the final contract and after money is transferred by bank (from 1 to several days), the keys might be handed over and the process of renovating the apartment might be started.

Grace period in repayment of principal while paying out loan in tranches

In the primary market, if we buy an apartment that is under construction, a loan in tranches is usually needed, which depends on the arrangements with the developer. So if we are going to buy an apartment in a new investment, we need to know that after the involvement of our own funds, we start paying tranches of the loan according to the state of advancement. It means that we begin to repay loan installments during the process of construction. In fact, these are interest-only installments, i.e. we only incur expenses of borrowing money, but we do not return the amount borrowed.

Such period is called a grace period in the repayment of principal and it is applied until the last tranche is paid or until the construction is completed. The costs of such interest-only installments will depend on the tranche schedule concerted with the developer. For example: we buy an apartment for PLN 400,000 and pay the developer five installments of PLN 80,000 each. The first tranche are our own funds and from the second to the fifth are the loan funds that the developer wants to receive in 4 tranches within 12 months. With an exemplary interest rate of 4.6% (the interest rate will be increased of 1% up to the moment of mortgage entry – an explanation below), the sum of interest-only installments paid during this period will be about PLN 8,000. Interest-only installments are paid from the amount of the loan paid out by the bank, i.e. the first installment from the amount of PLN 80,000 – it will be about PLN 302 / month, after launching the next PLN 80,000 (altogether PLN 160,000) – the installment will increase to PLN 604.

If we bought completed apartment and the payment was done to the developer after the completion of construction, we would avoid such a cost. The grace period might be also convenient for clients, who do not want to deal with a high installment while they have not moved to a new flat and incur rental costs.

The payment until the bank mortgage is registered.

In each mortgage loan, regardless of the purchased real estate, bank charges depend on the risk of the lack of establishing a mortgage. On the secondary market, due to the fact that the land and mortgage register are already established and  the application for mortgage registration is made before the loan is activated, the period for calculating bank charges depends on the time of processing the application by the court.

The observations indicate that it might be a period from one week (courts in smaller towns) to even several-dozen weeks. While the primary market is being concerned, it looks differently – the payment of the loan takes place before submitting an application for entry to mortgage, that is, the fee is charged from the first tranche till the date of establishing the land and mortgage register and entering the mortgage. Unfortunately, this process is usually quite long – up to 6 months (eg district court in Krakow).

What is the cost? Banks charge a fee by raising the interest rate (from 0.3% to even 1.5%). In the same example as above (PLN 320,000 loan amount) for the 30-year loan period, with an interest rate increase of 1% on the loan amount of PLN 320,000, we will pay, along with installments, approximately PLN 1,100 for 6 months.

Summary

Analyzing the credit cost, it is clear that the primary market will be more expensive than the secondary one. Buying an apartment on the primary market, especially at the very beginning of construction, we incur additional costs related to financing loans. Acquisition and crediting of the finished apartment from a developer who closes construction and wants to receive money just before the final agreement will be cost-effective to purchasing of a apartment on the secondary market. However, it should not be overrated and you need to remember about the other benefits of buying an apartment under construction. Purchasing at an early stage, we have a wide range of apartments, so we can better match the apartment to our own needs and, additionally, we can use promotional pre-sale prices.