Charles Pletsch at the state savings bank Spuerkeess shared these tips on the mortgage application process. This is general advice, which obviously is not specific to everyone’s individual situation.

1. Talk to your bank before looking for property

The first step of buying a home is to discuss your personal financial situation with a bank, including the amount you have available for the down payment, Pletsch said. An advisor can fairly quickly calculate “the amount of the loan” the bank can grant, “so you’ll definitely know what price you can pay.” This will narrow down your property search and save you a good chunk of time.

A banker can likewise explain the related costs, which could vary from an expat’s native country. For example, there are notary fees and registration duties to pay, which are based on the value of the home and land. “You must include this in your budget,” so it’s important to know these figures in advance.

2. Talk to at least one other bank

Most people would comparison shop when they buy a new car and it’s no different for a mortgage, Pletsch noted. Check with several banks. You might find better rates and terms if you look around.

3. Understand how the compromis de vente works

The compromise de vente (preliminary sale agreement or exchange of contracts)  “is not a formality”, but is a binding agreement, he explained. By signing it, “you’re engaging” to buy the property. If you want to break the contract, “you must pay 10% of the value” of the home to the seller.

However, buyers can insert a clause that cancels the transaction if “the bank refuses the loan.” This is “the only possibility” to avoid the 10% penalty. This type of clause is not automatically included, so check the contract carefully. “There is no standard form of compromis de vente, so you must pay attention.” The agreement will most likely be written in French; obtain a translation, if needed.

4. Figure out your down payment

Buyers typically need to put down at least 10% of the purchase price from their own funds. For investment property, this doubles to 20%. However, “for your first acquisition” of a primary residence, banks can “theoretically” provide “100% of financing.”

This is an important distinction for expats, because only Luxembourg real estate loans count. “If they own a house, for example, in their home country, they [can] still be [considered] first time buyers in Luxembourg.”

Homebuyers should reflect carefully on the higher monthly payments, because in any case “you still must reimburse the loan.”

5. Prepare documents for the application

Banks require information about the property and about the buyers. For the property, they’ll need the compromis de vente, “plans and pictures of the house or the apartment,” and detailed cost estimates for any planned renovations. The bank will check construction specifications to be sure they are complete, to avoid any potential “hidden costs” and “surprises” when the invoices start to arrive.

For each buyer, the bank will need copies of ID cards, social security cards and proof of revenue, namely payroll statements. “If you are not a customer of bank, we also need the relevés de comptes [bank statements] from the other bank, and proof of own funds,” the savings that you will use for the down payment.

“If the file is complete,” most banks will provide an official answer within one week, on average.

6. Know the difference between fixed and variable rate loans

A fixed rate mortgage will have interest payments that are listed out for the life of the loan.

Interest payments on a variable rate loan will fluctuate during the life of the mortgage; the amount will be adjusted after specific periods of time. Sometimes they start out lower than fixed rate loans, which makes them attractive at first glance. But that is not always the case and they can rise above fixed loan rates with each reset.

Currently in Luxembourg, about 60% of mortgages are fixed and 40% are variable rate loans, Pletsch said, citing central bank figures. It is not terribly common these days to switch between loan types, but it is possible to renegotiate with the bank. However, there are costs to cover. A borrower changing from a fixed to a variable rate loan “must pay six months of interest” on the first €450,000 in outstanding capital. For the amount “over this, you must pay the real funding costs,” which ensures the bank does not lose money on the transaction. So, homeowners should be sure the spread between interest payments for each type of loan truly warrants the shift.

Switching from a variable to fixed rate mortgage, “you only have to pay a small fee for the administration costs.”

7. Consider mortgage payment insurance

Although it is not always required in Luxembourg, banks strongly advise taking an assurance solde restant dû (outstanding balance insurance) policy, which will cover mortgage payments in case of death or disability. Otherwise, reimbursement will fall fully on a surviving spouse or heirs such as their children.

At a minimum, “we strongly recommend assurance solde restant dû to customers for their own protection in case of death. The partner who survived should be able to pay back the rest of loan. The goal is to keep the house after the death of one of the couple.”

Taking out a policy can be obligatory, when the down payment “is not high enough to cover the price risk of the bank at the beginning of the loan.”

Mortgage insurance need not be purchased from the bank or its preferred partner, Pletsch stated. “It’s an open market.”

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