Explanation of Terms
Within the financing area, construction or real estate financing is the most extensive area. Within this type of financing there are not only a variety of financing options, the conditions also offer a variety. There is the mortgage loan, also known as the annuity loan, but there are also other loans and types of credit that can be included in the construction financing. The loan amounts that need to be determined to the right extent are also diverse. Of course, it should also be noted that each financing, including real estate, incurs additional costs that must be included in the total financing amount.
Anyone who builds or buys real estate incurs not only broker commissions but also notary fees or expenses for the architect. And there are loan contracts, assignments as security, the transfer of collateral to the bank, entries in the land register with every property or real estate purchase, and there is the matter with the legal owner, who is only after the loan has been repaid. In addition, there are topics such as building society savings, building society loans, the Riester pension and state benefits. But no matter what the current interest rate situation on the market – when choosing the type of loan, it always depends on the current and expected economic situation of the respective borrower.
As a rule, real estate is financed with the well-known annuity loan, a loan with constant repayment amounts. The advantage of this financing variant is that the amount of the installment to be paid remains the same for the borrower over the entire term. In addition, an annuity loan not only pays interest, but also repays it, so that the interest portion is reduced in favor of the repayment portion. The borrower can therefore be sure that his loan debt will be completely paid off at the end of the term. The interest rate can be fixed not only over a contractually agreed period, but also over the entire loan term.
As an alternative to the annuity loan (fixed-rate loan), a loan with variable interest rates is available, the interest rate of which is updated at regular intervals depending on the dependency on the good credit company or another index. Choosing an advance bank loan can also offer certain advantages, because a building society contract can be pre-financed using this financing option. In this way, the developer does not have to wait until his home savings contract has been allocated because the bank grants him a loan in the amount of this home savings sum. If the building society contract is then ready for allocation, the loan is repaid. In many cases – to the disadvantage – there is no repayment during the term.
Anyone who already has a home savings contract (ready for allocation) can also use the home savings loan. A home savings loan is the difference between the contractually agreed home savings amount and the savings saved. The interest rate is set accordingly when the building society contract is concluded. If you want to partially or fully repay your home loan early, you don’t have to pay prepayment penalty. Another financing option is the annuity loan with a variable interest rate – also known as a cap loan. An interest cap for a certain amount is agreed over a predetermined term, which is why the borrower never pays more than the interest rate agreed as a cap.
Another financing alternative is the repayment loan, also known as the installment loan. This is a loan with a linear repayment. Within the fixed term, the monthly repayment is made up of the linear rate and the interest calculated on the remaining debt. The advantage: by reducing the residual debt, the amount of interest also decreases, which is why performance rates always fall within the term. Real estate financiers can also take advantage of a bank loan. The bank is currently offering good conditions for renovation measures. This financing component from bank also includes ecological requirements. A prerequisite for a bank loan is, however, that repayment of the loan is not made before the second year after the loan has been paid out. The times when there is no repayment period vary from offer to offer.
In addition to state subsidies, the federal states also repeatedly offer special loan offers that also have favorable terms. Here too – different from federal state to federal state – promotional goals such as modernization, new construction or acquisition are issued. Interested parties can contact the housing authorities. Applications must be submitted to the respective licensing authorities, and funding is always granted in accordance with the Housing Promotion Act.
Those interested can find detailed descriptions of the respective financing options for real estate under the heading Loan types.
Finance real estate reliably, avoid the biggest mistakes
There are still paradisiacal conditions for home builders and property buyers (as of 04/2011). Because construction money has never been so cheap since the Second World War. Even more. Almost every week, mortgage rates have slipped recently. The reasons for this are explained quite quickly. Because for a long time now, yields for secure government bonds and Bankerse have been falling rapidly on the Medium capital markets. The price of the building money is based specifically on the total return.
The tried-and-tested rule of thumb is: Take the yield of those Bankerse with a remaining term of ten years and add about 0.75 percentage points to their total interest. The bottom line is usually the average amount of ten-year fixed-rate mortgage loans.
Experienced investors provide several reasons for the still significant decline in yields on the capital markets. On the one hand, the economy in Euroland is not getting anywhere. Contrary to previous forecasts, economic growth is only very moderate. In such phases of comparatively weak economic growth, experience has shown that bond and Bankers yields remain below for a longer period. The second reason for low capital market interest rates is that due to the experience after the turn of the millennium with the bursting of the technology bubble, investors still do not really trust stocks as an investment form. In general, fixed-income securities, especially government bonds and covered bonds, are considered to be safe havens. The demand for such investments is always particularly high as soon as investors around the world are very averse to risk and therefore prefer to play it safe. Since the price, i.e. indirectly the total interest, of government bonds and Bankerse is also shaped by supply and demand, an enormous steady interest in buying leads to a significant drop in yields. This has been observed for some time.
Finally, another, also not insignificant, reason for the low capital market interest rates: A slowly developing economy everywhere leads to practically no inflation worries. The devaluation of money in EU-Europe has been at less than two percent a year for a long time. This is precisely the target of the Lite Bank (LB). So if those two percent devaluation rate is exceeded over a longer period of time, the stability keepers are usually forced to raise their key interest rates. This often leads to rising bond and Bankers yields. However, since inflation is not an issue in Euroland for the time being, both the key interest rates set by the LB and bond and Bankers yields remain below.
One man’s meat is another man’s suffering. For a long time now, savers and investors have been struggling with the interest and yields that are rather poor for them. Anyone who currently entrusts his money to the Federal Minister of Finance for ten years by buying a German government bond, for example, will only get a three percent return. After deducting the current inflation rate, there is still a very respectable real interest rate. But as soon as investors have reached their tax-free savings allowance and have to transfer part of their investment income to the tax office, there is often – again real – a zero-sum game.
It is low interest rates – and many do not know what that means for real estate financing
Anyone who now needs foreign money, for example in the form of a mortgage loan for buying or building a home, is fine. The conditions in all maturity areas are at a record-breaking low level. Construction money with a ten-year fixed interest rate (as of 4/2011) currently costs between four and 4.5 percent effectively. This cash price is well below its long-term average, which hovers around 7.8 percent, again for loans with ten-year fixed rates. Expressed in USD and cents: Based on the long-term values, a building loan of 100,000 USD, for example, costs almost 8,000 USD in interest alone. Such a loan is currently available for just 4,000 USD. The bottom line is an enormous savings in interest, which gives everyone who now purchases a home and has to finance it, considerable financial leeway.
At a monthly rate of 800 USD, including a two percent repayment, 160,000 USD can be easily raised at the moment. However, many financiers underestimated the amount, while some expected a higher loan amount. Many do not even know that they can create real estate property according to the motto “buy instead of rent”. Banks and building money brokers are in demand here. They need to educate their customers even better about the chances in low interest rates. Despite the recent interest rate hike and already rising conditions, borrowers are currently receiving very high loan amounts with a moderate monthly credit burden. As a result, the low interest rates significantly reduce the financing risk. On the one hand, conditions of just over 4 percent ensure a low credit burden. On the other hand, many borrowers can choose an initial repayment of two percent or more, which speeds up deleveraging. Anyone who chooses a two percent initial repayment is already debt free after 27 years.
But be careful: The low interest rates often do not protect against costly mistakes in home financing. Some builders, buyers and financiers rely on the favorable conditions, while ignoring other important facts and circumstances that are simply part of a long-term weatherproof debt and financing strategy. So there is a whole range of inattentions, unfortunately also mistakes that home financiers keep making. With the effect that the entire project is ultimately even more expensive than hoped for or even wobbles unexpectedly in the event of unforeseen events. Below is an overview of the most common mistakes and how to avoid them and what the right solution for homeowners and financiers looks like.
So-called large, quick or full financing, as they are issued today by many credit institutions and building societies, represent a bank for most real estate financiers , as is touted as serious, usually ends in the foreclosure sale. In most neighboring countries, corresponding legal bases even ensure that such financing alternatives are fundamentally prohibited. The reason lies simply in the fact that the financing models described here are based exclusively on non-performing construction loans. Not only the amount of the home savings to be concluded with its additional costs, but also the additional credit for the pre-financing is almost always above the actual money requirement of a building owner.
Below you can see how such financing packages are composed:
The main problem of this financing variant lies in the fact that the real estate financier also has to pre-finance the entire immediate deposit for the building loan contract in addition to the construction money actually required. This means that not only do the builders make enormously high monthly contributions, the whole thing is also made considerably more expensive by the construction. The pre-financing of the home savings contract only brings the customer meager interest, while on the other hand he also has to pay the usual market interest on this amount.