Encyclopedia of real estate financing

From A for provider to Z for fixed interest rate. We explain the most important terms relating to buying and financing.

Woman holds pen in hand and makes notes

Foreign currency loans, muscle mortgages, market and mortgage lending values, fixed interest rates – real estate buyers are suddenly confronted with such terms and feel overwhelmed to make the right decision.

To ensure that you are well prepared for the often lengthy process of purchasing a house or apartment, we will explain briefly and precisely what is behind the terms and what you should bear in mind in each case.

Banks warn again and again their customers against the “direct offerers. Service would be lacking, the credit granting would not work out. Direct providers do not provide advice, so the customer must know, for example, which fixed interest rate he wants to enter into. The loan agreement ready for signature is usually available to the customer more quickly than at the “house bank”. In addition, the interest rate with direct providers is on average 0.1 to 0.2 percent better. In the case of high loan-to-value ratios, local banks have caught up in the meantime.

Advice is important, but not every bank gives really good advice. Many banks now only sell financing and sell what brings the bank the most money. Advice should therefore be sought from institutions (u. a. the consumer advice centers), which do not earn any money from financing. The intermediaries of direct providers do not have to be paid. The bank takes care of that. If the financings are however complicated (too little own money, self-employed persons, complicated intermediate financings), so some direct offerers do not fit. Large direct providers (Klein& Co, Interhyp) have meanwhile started to advise their customers on site.

Many people believe that it is not possible to purchase real estate without a building savings contract. And yet many a building savings contract is difficult to integrate into a financing arrangement. In view of the low level of interest rates, the effective interest rates for many tariffs are uninteresting. Building savings are only worthwhile if interest rates are set to rise sharply.

But even attractive loan interest rates at the building society always have a downside: low interest on credit balances.

In most cases, building savings have not paid off in the past. Besides the load is high with building savings loans. The standard tariff provides for repayment within ten years. Interest and repayment are thus annually over 10 percent of the loan amount. However, rapid repayment is not everyone’s cup of tea. The average financing period in Germany is 26 years. The best tariffs of the building societies were examined by magazine financial test. But even the right choice of tariff does not guarantee that the conclusion of a home savings contract will be worthwhile for the home saver.

What makes for good advice?

Also the advice-looking for should prepare itself for the consultation. He should compile the following documents: Statement of income and expenses, own money, cost of the property. Very important: Since in principle with a financing each savings contract stands to the disposition, should be clarified, what happens with existing capital life and pension insurances in the future. The same applies to existing building society contracts or, if applicable, building loan agreements. Other financial investments such as savings plans, funds, etc.

In the consultation it should be clarified first whether and in which height a financing is possible. Family planning should be taken into account. The advantages and disadvantages of the various forms of financing should be explained (amortizing loans, advance financing of bauspar contracts, repayment suspension models). It should be examined whether a public promotion is possible (Hamburg investment and promotion bank, investment bank etc.).) and which credits of the Kreditanstalt fur Wiederaufbau (KfW) can be integrated in the financing. The different interest rate lock-in options (20 years, ten years, five years or longer) and the protection of the financing (term life insurance) should be discussed in detail.

Every real estate buyer should have own money. 15 to 20 percent of the total volume (purchase price plus ancillary purchase costs) is necessary. More own money never hurts. If the customer has a good credit rating, some providers are willing to finance up to 100 percent of the purchase price. Incidental costs, but also accessories (such as z.B. Kitchens) or renovation are not co-financed.

Loans from the Kreditanstalt fur Wiederaufbau do not replace personal funds. Since banks guarantee the repayment of these loans, they do not improve the financing situation. Own money is not infrequently hidden in existing savings contracts (z. B. life and pension insurance). Here it should be examined very carefully, whether these contracts are not better dissolved. Own contribution with the building (so-called muscle mortgage) replaces only conditionally own money. Overestimating own contribution is one of the most common reasons for financing failure.

Never put all of your own money into a financing! A “nest egg” (5.000 to 10.000 Euro) should always be kept back. A certain amount should also be available for the time of an overlap of rental and financing costs until moving in.

In southern Germany, it is common to take out real estate loans with Swiss banks. Since the interest level in Switzerland is lower, this seems to make economic sense at first sight. What is overlooked is that the loans are in Swiss francs. The borrower has a loan with a favorable interest rate, but bears the currency risk. If the exchange rate of the Swiss franc rises against the euro, the borrower must pay correspondingly more. The interest advantage can thus be compensated very quickly. However, if the borrower himself has income in Swiss francs – in the Swiss border area this may be the case – this does not apply. Japan has an even lower interest rate level. Most German banks are able to arrange corresponding loans. Since these credits are very care-intensive because of the currency fluctuations, financing sums of less than 300.000 Euro is difficult to obtain. Conclusion: For professionals and with higher financing volumes foreign currency loans are quite an alternative, for the normal real estate buyer such loans are too speculative.

On each purchase price must be paid depending upon Land 3.5 to 6.5 per cent land transfer tax. The land transfer tax does not apply if the property is sold to relatives 1. Order is sold (parents, children, grandparents). The real estate transfer tax is due upon conclusion of the purchase contract. Every contract is presented to the tax office by the notary public. If the real estate transfer tax is paid, a clearance certificate is issued by the tax office. Without this certificate the buyer will not be registered as the new owner in the land register. If accessories are shown in the purchase contract, no real estate transfer tax has to be paid on them. Accessories are anything that is not permanently attached to the building and can be removed at any time, such as e. B. Fitted kitchens and furniture. Attention, accessories are not co-financed by the banks.

In the case of new buildings, real estate transfer tax must be paid not only on the land but also on the construction work, even if the land is not purchased from the developer but from a third party. If the builder is no longer free to decide with whom he builds, land transfer tax is incurred on the entire volume.

Loan interest rates are higher than savings interest rates. This simple basic rule is not heeded with so some financing. The faster you repay a loan, the more you save. Therefore, the borrower should repay his loan directly as soon as possible and not save in parallel instead. It would be worthwhile for him only if the guaranteed interest rate on savings were higher than the interest rate on loans. But this is only in exceptional cases. If it worked, we would all be rich. We would take out loans and invest the money at a higher interest rate and could live on the difference.

Therefore, if financing is required, all savings contracts are up for discussion. Any financing in which the loan is not repaid directly, but a savings contract is concluded for repayment, is problematic. This is especially true for financing owner-occupied real estate. In the case of rented properties, the situation may be different for tax reasons. Forecasts for savings contracts (z. B. with share funds, life and pension insurances) are not reliable. Only the guaranteed interest rate is decisive.

The real estate search usually takes longer than expected. Several months are not the exception, but the rule. A feeling for the prices on the market develops gradually. 20 to 25 real estates should have visited each buyer, before it decides for a property. Information on reasonable purchase prices in Hamburg is provided by the appraisal committee of the building authority (0900 1 880999, 0.24 € per minute from a landline; mobile more, plus 25 € per reported value), to which every sale is reported. Real estate prices can be negotiated. On average, real estate prices will increase by approx. 10 percent down. Transport connections and the surroundings of a property are important. For old real estate there is no warranty. That’s why experts should be consulted (z. B. Consumer advice center or association of private builders), which check the structural substance. You should always inspect a property at different times of the day and on different days of the week. Light and noise conditions can be very different and can greatly affect the value of a property.

Before any real estate financing should be a cash review. Even with the momentarily low interest rates the load is usually higher than the rent paid so far. If it has not been possible to save up to now and if the burden of financing is usually even significantly higher than the rent, this means considerable restrictions on the previous standard of living.

The cost of the car is almost always underestimated. It is almost impossible to keep a car for less than 200 euros per month. “Out of town” means lower purchase price, but on the other hand also higher costs for mobility. If the second car can be saved, 50.000 euros more can be financed. Every savings contract stands (z. B. also endowment life and pension insurance) in the case of financing to the disposition. For one simple reason: loan interest rates are higher than savings interest rates. An insurance check can lead to considerable savings. Many insurances are superfluous, most are too expensive. On the other hand one should not subordinate also everything to the real estate acquisition. Your own house alone does not make you happy.

In addition to the land transfer tax, there are notary and land registry fees (1.5 to 2 percent). Real estate purchase contracts without notarization have no effectiveness. Settlement via a notary escrow account is always recommended if the property is still encumbered. While purchase contracts for existing properties tend to be unproblematic, purchase contracts for new buildings, as well as contracts for work and services that do not have to be notarized, should be drawn up by experts (z. B. lawyers from the consumer advice center) should be checked.

All contracts should be understood! Which is not always easy, because they are usually written in a difficult to understand legalese. The notary also helps here by reading out the entire contract again when it is signed. Agreements must be available to the buyer two weeks before signing in the case of contracts between companies and private individuals. But also in all other cases, a contract should never be signed under time pressure. Brokerage fees do not have to be recorded with the purchase contract. Although this is in the interest of the broker, who can immediately execute in the event of non-payment. But in this case the buyer has unnecessarily higher costs.

Notaries can be chosen freely. Local responsibilities do not exist.

Appraisal costs do not have to be taken into account when determining the effective interest rate. Direct providers usually waive this fee. With all other offerers can be negotiated over the waiving of these costs (100 to 300 euro). Hardly any bank really appreciates the property. Construction documents and a photo are usually sufficient. Only in the case of financing over 300.000 euros, appraisers are still called in.

If the loan is not called in immediately, which is usually the case for new construction, most banks charge commitment interest after three months (1.8 to 3 percent p.a. on the amount that has not yet been claimed). But even here you can negotiate with the providers. Good offerers offer credits six, very good twelve months provision interest-free.

Dividing the loan amount over different fixed interest periods is sometimes the order of the day, but it is also not without its problems. In principle, financing should be kept as simple as possible. A split can be useful if the borrower expects an amount at a certain time. If so, the fixed interest rate should be selected in such a way that it is possible to redeem the loan at this time. For partial loan amounts, however, many banks require minimum amounts (30.000 euros or more). Splitting can also make sense if one speculates on the fact that two shorter interest rate fixings (lower interest rate!) are better than a long fixed interest rate. If interest rates fall or remain the same, this strategy works out at. Overlap interest rate commitments, the customer can not change, because the other loan can not be redeemed. Partial financing through another bank is not possible, because the loan can not be secured in the first place in the land register. This situation is exploited by some banks (bad interest offers). Therefore, care should be taken to let all interest rate lock-ins end at the same time after a certain period of time. The borrower does not have to accept then the offer of the financing banks, but can change the offerer.

Refinancing of real estate loans is always recommended. It is completely overlooked thereby that the borrower has in principle no requirement to repay loans within an interest connection prematurely, not even if it is ready to pay a prepayment penalty.

Most banks generally refuse early repayment. If the bank agrees to repayment, it can freely determine the price for repayment (prepayment penalty). The compensation may only not be immoral. Not every debt restructuring is worthwhile. The residual interest commitment to be compensated should not be longer than three to four years. Otherwise, the interest rate advantage is virtually “eaten up” by the early repayment penalty. The consumer advice center in Hamburg checks whether the early repayment penalty has been calculated correctly.

Two terms that are often confused, but whose distinction is very important for each construction financing. Finally, the interest rate depends on the respective market and mortgage lending value. The higher the property is lent, the worse the interest rate. The market value is generally the purchase price, unless this is obviously too high and not in line with the market. Most providers finance up to 90 percent of the market value, a few even 100 percent. More than 100 percent is not financed or only in exceptional cases.

The mortgage lending value of a property is at least 10 to 15 percent below the market value (safety discount for the bank). If the purchase price is 100.000 euros, a bank based on the mortgage lending value will finance a maximum of 90.000 euros (= 100 percent mortgage lending value). 60 percent mortgage lending value (= real loan) is considered safe by lenders.

In this range (up to 54.000 euros in the example given), there are the best interest rates. If more must be financed, interest surcharges of up to 0.3 to 0.4 percent are added. Movable things (accessories), z. B. Kitchens, remain unconsidered when determining the value.

If a loan is repaid during an ongoing fixed-interest period, the borrower must pay an early repayment penalty to the bank. The calculation of the early repayment penalty has long been controversial. However, the Federal Court of Justice has now largely specified the calculation steps through a series of decisions.

After that, the repaid money is (fictitiously) invested on the capital market. The current Pfandbrief yields are authoritative. The difference between these yields and the interest rate on the loan (nominal interest rate) results in the loss. The calculation must further take into account that the bank will no longer manage the loan in the future and that there is no longer any need for risk provisioning.

The approaches of banks and savings banks are very different here. While the consumer center in its reviews the saved expenses with 0.15 percent p.a. some lenders are significantly lower (0.0 percent p.a. up to 0.06 percent p.a.). It is disputed, to which reference date must be calculated. Since yields change daily, prepayment penalties can vary significantly within four weeks. There are considerable differences in the cost of calculation (100 to 500 euros).

In principle, no more than 40 percent of the net income should be spent on a property. Special payments such as Christmas or vacation bonuses are not taken into account.

Example: Family with two children, husband’s net income 2.200 euros, twice child benefit à 192 euros plus 400 euros income of the woman, altogether 2.984 euros per month. Forty percent is 1193 euros. In additional costs for the house (heating, water, insurance, etc.).) arise at least 2.50 euros per square meter and month.

100 square meters, the additional costs amount to 250.This leaves 943 euros for financing. At an interest rate of 2% plus 2% repayment (fixed interest rate of 15 years), the monthly costs are 333 euros per 100.000 Euro financing amount. The family can thereby 283.000 euros financing. In addition the own money (in this case 50.000 euros). The total volume can thus be 333.000 euros. Ancillary purchase costs can be up to 13 percent (4.5 percent land transfer tax, 1.2 percent notary and land registry costs, 6.5 percent brokerage fee). The purchase price of the real estate can thus up to 294.000 euros amount to. Special funding opportunities through the Kreditanstalt fur Wiederaufbau or z. B. by the Hamburgische Investitions- und Forderbank (IFB Hamburg) are not yet included in this calculation.

Every fixed-interest period, whether longer or shorter, has advantages and disadvantages that need to be weighed up. All fixed-interest periods of more than ten years can be terminated unilaterally by the borrower ten years after disbursement of the loan (§ 489 BGB), but with a notice period of six months. This right cannot be excluded by contract. The lender, on the other hand, cannot terminate. If the interest rate is fixed for 15 years, the customer can wait in peace for the last 4.5 years until the interest rate level is favorable for them. Then he cancels and concludes again. This flexibility has its price. Loans with a fixed interest rate of 15 years are approximately 0.5 percentage points more expensive than ten-year fixed interest rates. With a credit over 200.000Euro the customer pays thus monthly 83 euro more. Viewed over 15 years, this is still 15.000 euros.

Some may prefer to use this amount for repayment, but are then not as flexible in follow-up financing. Longer fixed interest periods than 15 years are also possible, in some cases up to 40 years, although here a further interest surcharge – depending on the term – of 0.1 to 1.0 percentage points is payable. However, not all lenders offer long fixed interest rates.

The choice of the fixed interest rate period is perhaps the most important decision in financing. There is no patent remedy, because no one knows how interest rates will develop over the next few years. Providers like to advise long fixed-interest periods (ten or 15 years), because this also binds the customer for the long term. All long-term commitments but in retrospect were wrong in the last 15 years because the interest rate level has fallen. Who commits itself on a long-term basis, sets on rising interest level, who commits itself short (variable) or medium-term (five years), on sinking or constant level. There is much to suggest that interest rates will tend to rise in the next few years, but interest rates of over 6% are not necessarily to be expected. In addition to interest rate speculation, the borrower’s need for security is also a decisive factor in the choice of fixed interest rate. No financing is worth losing sleep over concerns about interest rate increases. In this case should be financed in the long term. Even those whose budget can hardly cope with an increase in interest rates should make a long-term commitment, preferably 15 years or longer. A variable interest rate is interesting if a high unscheduled repayment potential is foreseeable.

Over and over again angepriesen as the golden way in order to acquire a real estate favorably, auctions by order of the court become. Thereby the problems of a forced sale are overlooked. Good properties are usually sold before the auction date. Properties that are auctioned off are often problematic properties. Although expert opinions are prepared before each foreclosure sale, which can be viewed at the respective offices of the district courts, this does not provide a complete picture. Viewings are often not possible, so that the “cat in the bag” is bought at auction. Many banks refuse the financing of such objects not least because of this reason. Auctions require a lot of discipline. If several offer in a forced sale, also times bids are delivered, which lie higher than the value of the real estate. For the layman it is difficult to see who is bidding or who is just trying to drive up the price. Long consideration times do not exist in an auction. Therefore, everyone should set a limit in a foreclosure auction.

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