Loans are an extremely important financial instrument for most people, especially for young individuals who are purchasing their first property

The purpose of solving the housing problem is primarily interested in whether the credit is capable and what the monthly installment amount will be. However, it is not enough to focus only on credit approval or affordability of the current monthly payment, because the home loan is repaid over the long term. Banks offer different mortgage credit offers that need to be understood. If you understand the conditions, you will easier negotiate and choose the option that is long-term acceptable. What is interest and how is it calculated? Interest rates on credit are the cost of borrowed money. They depend on:

loan amount
credit repayment period (credit period)
agreed interest rate (rate)

Interest is calculated based on the interest rate (rate) which is expressed as a percentage and is always linked to calculation period or term (most often it is one year). Interest rates can be calculated:

relatively (proportional) method
conform method

Regarding the time of calculation:

anticipatory, when the interest calculation is carried out in an appropriate manner at the beginning of the calculation period
decurative, when the interest calculation is carried out in an appropriate manner at the end of the calculation period

What is the interest rate? The interest rate is the percentage of the debt that the credit user must pay to the bank within the agreed period. Different types:

Nominal interest rate - During the repayment of the loan, interest is calculated on the outstanding loan amount that the client has not yet repaid (which is still not due for payment, according to the agreed terms).
Interim interest - Within the period of credit use, from the day of credit repayment to credit transfer into repayment, interim interest is calculated. Calculation is carried out according to the agreed method for calculating nominal interest rates, taking into account the actual number of days.
Effective interest rate - The effective interest rate (EKS) is the total cost of the loan that the client pays to the bank. In addition to the nominal interest rate, the effective interest rate also depends on:
- amount of fees that the client pays to the bank upon credit approval
- repayment period of the loan
- amount of the guarantor deposit, if any
- other costs (e.g. insurance premiums…)
The bank has a legal obligation to provide each client with an estimate of the effective interest rate. This allows clients to compare the actual cost of the loan in different banks.

The EKS calculation for does not include:
- judicial fees
- delayed interest or
- any other costs arising from non-compliance with the loan agreement terms, postage, telegram and telex costs
Delay interest rate - In the event of irregular loan repayment, a delay interest rate is calculated on the outstanding unpaid principal that should have been paid. The maximum interest rate is statutorily prescribed and is calculated only on the repaid principal and not on interest.
- The current statutory delay interest rate is 5.61% per annum. The change depends on the change in the provision that regulates the interest rate.
Regarding the property of variability of the nominal interest rate, they may be:
1. Fix interest rate: it does not change throughout the entire repayment period and is not dependent on market conditions, which change during loan repayment.
2. Variable interest rate: subject to change during the loan repayment period, due to changes in the reference rate, within the conditions defined by law
In the case of mortgage loans, it is most often used combination of fixed and variable interest rates. It defines period during loan repayment in which the interest rate is fixed, and in which it is variable.

Regarding the property of variability of the nominal interest rate, they may be:

Fix interest rate: it does not change throughout the entire repayment period and is not dependent on market conditions, which change during loan repayment.
Variable interest rate: subject to change during the loan repayment period, due to changes in the reference rate, within the conditions defined by law

At mortgage loans, it is most often used combination of fixed and variable interest rates. It defines period during loan repayment in which the interest rate is fixed, and in which it is variable.

EXAMPLE combination of fixed and variable interest rates:

credit of 500,000 kunas

Agreed:

fixed interest rate of 2.95% per annum, for the first five years of loan repayment, and
variable interest rate of 2.56% per annum (6M NRS1 for HRK (0.13 p.p.) + 2.43 p.p.) for the remaining period of loan repayment, repayment period of 20 years (240 monthly installments)

The EKS (effective interest rate) is 3.90% with included costs of fire insurance premium of the property and the premium of loan repayment, and the costs of current account management.

Repayment is in installments:

monthly installment in the first period of repayment amounts to HRK 2,760.50
monthly installment in the second period amounts to HRK 2,686.04

The total amount that the client must pay is HRK 703,744.90.

Difference between fixed and variable interest rates

FIXED INTEREST RATE

VARIABLE INTEREST RATE

No interest risk In the case of an increase in the reference interest rate

agreed interest rate remains the same
unchanged monthly installment amount
unchanged loan cost (not applied)

In the case of a decrease in the reference interest rate

agreed interest rate remains the same
unchanged monthly installment amount
unchanged loan cost (not applied)

Interest risk In the case of an increase in the reference interest rate

agreed interest rate increases
increases the monthly installment amount
increases the loan cost

In the case of a decrease in the reference interest rate

agreed interest rate decreases
lower monthly installment amount
reduced loan cost

What affects the change in the variable interest rate? Variable interest rates consist of two parts:

fixed part that does not change throughout the loan repayment period
variable part that depends on the movement of the reference market interest rate for a certain currency. This may be, for example, the national reference rate (NRS), EURIBOR, deposit transfers to the Ministry of Finance treasury accounts or the average interest rate on deposits by citizens

Variable interest rate = fixed part + variable, changeable part (reference rate) Example: 2.56% per annum = 2.43 p.p. + 6M NRS1 for HRK (currently 0.13 p.p.) Variable interest rates have been regulated since 1 January 2013. Law on consumer credit has regulated the interest rate in a way that the interest rate must be linked to the publicly announced reference rate. Such interest rates can only be changed due to a change in the reference rate.

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