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Precontractual Transparency and Mortgage Cost

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  • Antonio Caggia
  • Giovanni Paolo Crespi

Abstract

The European Community legislation, embedded into italian regulation, prescribesminimal information banks should provide clients before entering into a loanagreement. Starting from the reading of the sheets of a sample of italian banks, thenote explores the effects on the calculation of upstream common interests of twoclauses in mortgages with «French style» redemption: the method of calculating theeffective rate by which to determine the payment amount and the choice of differentfrequencies of the installment, keeping constant the interest rate. The aim ofthis paper is to highlight how these choices may affect the total amount of interestspaid, even when, in the second case, TAN and APR are constant. Furthermore it isobserved that the practice of declaring the annual rate of funding decomposed intoa risk-free rate of reference (normally in compound interest) and a spread (whichshould represent the risk profile of the borrower) may not help the average customerto fully understand the cost annual rate of interest paid on capital.

Suggested Citation

  • Antonio Caggia & Giovanni Paolo Crespi, 2013. "Precontractual Transparency and Mortgage Cost," Banca Impresa Società, Società editrice il Mulino, issue 1, pages 63-78.
    • Handle: RePEc:mul:jqmthn:doi:10.1435/73810:y:2013:i:1:p:63-78
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