The real estate loan is probably one of the most used loans. Because your own four walls are the dream of many people: Independent of landlords and neighbors in their own home, which also serves as an inflation-proof investment and retirement savings. But only very few people have the financial means to fulfill this dream without any third-party funds. This is where the real estate loan comes into play, granted by banks and other providers such as building and loan associations, in order to make the home a reality and close the financial gap.
Is a real estate loan sufficient for financing alone?
In principle, real estate financing is made up of equity (for example, savings or equity assets) and debt (for example real estate loans from banks). In addition, there may also be shares from state subsidies such as housing restrictions or funds from promotional programs of Intrasavings Bank.
Why are real estate loans earmarked?
Strictly earmarked means that credit institutions expressly grant real estate loans and real estate loans only for the purpose of real estate acquisition, building construction or property refurbishment.d
This includes the credit for a condominium. To secure their claims, banks expect in return a mortgage (see mortgage), so mostly a book mortgage on the property to be financed.
What types of real estate loans are there?
The difference between real estate loans and real estate loans is the use of the real estate that is acquired, renovated or built: Anyone who wants to use the property as a resident, takes on a so-called owner-occupier financing, while someone who builds, buys or refurbishes real estate for the purpose of letting, an investor financing needed. On the other hand, real estate loans differ according to whether they are taken up by private individuals or for commercial financing.
Commercial real estate loans
Commercial real estate loans finance the acquisition or construction of commercial or residential real estate that becomes part of the business assets. This includes residential real estate that is being built for the purpose of letting. There are only a few companies active in this sector in Germany; Most municipalities and housing cooperatives operate in this market.
Private real estate loans
Providers of private real estate loans are all major banks, insurance companies, building societies, direct banks, special mortgage banks, the Intrasavings Bank (Kreditanstalt für Wiederaufbau) or state promotional institutes. As late as forty years ago, construction loans were almost exclusively offered by building societies and banks; Meanwhile, more providers have been added, which allows cheaper loans, but also requires accurate comparisons from the borrower.
Corporate real estate loans
By contrast, corporate real estate loans are more likely to finance the purchase or construction of office buildings, businesses, shopping malls, medical practices, and the like. Public real estate such as schools, town halls, swimming pools and the like are either financed entirely by public funds or with the participation of companies from the private sector (so-called Public Private Partnership).
Both commercial and private real estate financing are of high economic importance, as required housing is created and funds flow into the very employment-intensive construction sector.
Requirements for obtaining a real estate loan
Real estate loans are usually the cover of fairly high sums to be financed for the construction, purchase or even renovation of a home or condominium. Accordingly, credit institutions do not lend themselves lightly, but only after careful consideration such a loan.
In addition to the borrower’s disposable income, the value of the property to be financed (which serves the bank as collateral for its loan) and, in particular, the borrower’s equity capital contributed to the calculation and approval, are examined in detail.
This means that even before borrowing the object to be financed must be presented. This is valued by the bank (regardless of the mentioned purchase price). Added to this is the examination of the income situation (the last pay slips).
Without equity, no real estate loan?
A special role is played by the consideration of equity capital, ie the sum which the borrower can raise himself for the acquisition or construction of the property. The equity ratio is a signal to the banks when granting a real estate loan that the borrower is not only solvent, but also committed and involved in the risk. Consumer advocates also emphasize the importance of a high equity stake for all sides. An equity ratio of at least twenty percent is generally recommended.
How is the equity composed?
Equity capital includes bank deposits as well as savings accounts or time deposits. In addition, for example, equity assets, which is due to the market movements of fluctuating value. Employer loans and state subsidies are also added to equity by the banks, as well as the own contribution to be provided by the borrower, which, however, should not be overstated. The ancillary costs (on average about ten percent of the total construction costs) should, if possible, be covered by equity. As a rule of thumb, the more equity, the cheaper the real estate loan.
Germany and equity financing
Unlike in many other countries, Germany is rather cautious, that is to say, it is financed with a rather high share of equity in real estate loans. This has grown in recent years to an average of over 22 percent. Accordingly, the home-ownership rate is also significantly lower than in many neighboring countries (currently there are approximately 36 million homeowners and landowners in Germany).
Receive a real estate loan without equity
Some providers now also allow real estate loans without any equity capital – these are naturally much more expensive, and the risk to the borrower is not insignificant. This full financing or mortgage lending, since banks require a high monthly income and very good credit rating, is particularly interesting for young people who already earn very well, but have not yet accumulated assets and still want to quickly acquire a property. The thorough examination of all factors not only serves the security of the bank, but also protects the borrower against unrealistic assessments of the object or the possible monthly burdens and thus against any over-indebtedness.
Determine the optimal amount of the loan amount
The loan amount of real estate loans is at least 25,000 to 50,000 euros for most providers. Those who need less should consider using a normal consumer credit. Although these normal installment loans are not earmarked, they also have significantly higher interest rates (since the bank has no corresponding collateral).
In contrast to installment loans, a so-called fixed interest rate is normally agreed for real estate loans, which stipulates the interest rate to be borne for the loan over several years. Irrespective of the actual development of the general interest rate level, this borrowing rate is then fixed at five, ten, fifteen or even thirty years, which provides appropriate planning certainty.
Various models eradication of real estate loan
To repay the real estate loan within a set timeframe. The most common model for repaying a real estate loan is the annuity loan: this means that the repayment is credited directly to the loan amount, which reduces the interest burden. The maturities and fixed interest periods are usually five, ten or fifteen years. The shorter the agreed fixed interest period, the lower the interest rate.
However, there are risks associated with these shorter terms as interest rates rise. Also, home savings loans are to be regarded as annuity loans as soon as they are allotted. First, they serve the future financing of a real estate acquisition.
Hardly used is the repayment loan, in which the payable monthly installments gradually smaller, as although the repayment remains the same, but the interest rates are lower.
The third variant is the term loan. The monthly payments are credited only to the interest. At maturity, the entire loan amount is then repaid in a single payment (this is usually a parallel savings contract, which accumulates the corresponding assets during the term of the loan).
Protection against default risks in real estate loans
The default risk is collateralised by the bank with a first-ranking mortgage on the property to be financed. However, in the event of foreclosure of the property, the full amount of credit still outstanding is often not obtained, leaving some risk to the bank. Falling real estate prices can also ensure that the hedge for the bank is no longer sufficient.
Only after complete repayment of the real estate loan does the ownership of the property pass to the borrower. This can protect against his risk (for example, unemployment or divorce) with appropriate loan loss insurance. Both parties to the contract should be particularly careful in selecting and hedging due to their long-term relationship.
Asset development in the presence of a property
A property purchase for personal use is usually primarily the acquisition of own housing and the protection for old age. Advantages are the elimination of rental expenses and a possible increase in value. In return, however, the property may also lose value. Instead of rental expenses, loan installments of real estate loans as well as maintenance costs now occur. Whoever places value on returns for self-occupied properties should pay particular attention to the location of the property to be financed, because in sought-after locations, real estate prices have seen a steady upward trend for almost three decades.
Follow-up financing building loan: after the loan is before the loan
Mortgages generally provide maturities of five, ten or fifteen years for repayment – so there is usually a remaining sum to be funded at the end of the funding period. For these, it then requires a follow-up financing, which is continued either at the same bank or at another provider. A provider change can have advantages. Even small deviations in the interest rate make enormous sums of money over the years or decades.
The full repayment of a real estate loan usually requires several follow-up financing. As soon as the bank has matured its fixed interest period, the borrower may decide to extend the loan to the bank or restructure it and switch to another provider. Even with a difference of 0.2 percent, such a change (or a renegotiation at your own bank) may be worthwhile.
Real estate loan: planning and costs
If you take out a real estate loan, you have a long-term commitment that generates high monthly pay for a very long time. Even if (as long as the property is not used as an investment to be leased, but for your own use) monthly rent payments are eliminated, should be planned in advance and calculated exactly how high the burden of the mortgage may be. First of all, a budget is required for the overview of all expenses incurred, as well as an overview of the available equity and the maximum monthly installment payment to repay the real estate loan.
Use real estate loan comparison!
Once the installment has been determined, as well as the estimated purchase price of the property, it is advisable to compare the terms of various providers with a real estate loan calculator. For this purpose, a number of online portals are available on the Internet, based on the standard conditions of real estate loans and then on the basis of individual inputs (such as desired rate and total funding amount) show a real estate loan comparison of the cheapest provider.
Even small differences in interest rates quickly add up to potential savings of several thousand euros, depending on the provider, due to the long maturities and the large loan amount. There are also online tools to help with the complex planning of your own property for the preliminary calculations of regular costs, available equity and the possible monthly installment.