Real Estate Financing
Financing a real estate purchase
Finding the right financing plan
If you decide to invest money in building or buying a home, you’ll soon be faced with an important and fundamental question: how will you finance your purchase? Buyers or homebuilders who can pay for everything upfront and out of pocket are far and few between; most will want to consider a real estate financing plan.
Real estate financing works much like any other loan: prospective buyers receive financial support from their bank, which they slowly repay in regular instalments plus interest. One specific feature of real estate financing is that it must be entered into the land registry, a government-run register used to administer property rights in Germany. Entering your property into the registry provides security for your bank in case you should fall behind on your payments. Moreover, a property loan is always tied to a specific purpose – buying or building property – and cannot be used for any other type of expense.
Consulting and support for your real estate financing
Whether you’ve already decided on a specific property or are still looking for that perfect apartment, ZIEGERT is here to support you with deep expertise and decades of professional experience. Our experts at more than 300 independent banks can answer all your questions and address all your concerns regarding financing options. Meanwhile, our skilled advisers help determine which financing option is best for you and whether or not you’re eligible for government subsidies. As part of your consultation, we’ll review all forms of real estate financing in order to develop a strategy tailored to your specific needs and personal goals. We value your input in this process and strive to offer numerous financing plans that have been optimally adapted to your individual situation. Our advisers will walk you through the advantages and disadvantages of every relevant decision in putting together the ideal financing plan. In the end, though, the decision will fall to you. Our team of advisors is happy to present you with all possible options – but the final choice is yours.Once you’ve selected a financing plan, our consultants will continue to support you throughout its implementation, starting with the collection of all necessary paperwork required by your bank. Once your application has been approved by a financial institution, you’ll receive contract documents to review; here, too, your advisor is happy to help. Together, you’ll go through all the documents in detail and clarify any open questions. After that, all that’s left is to sign the contract and your financing plan is official. But even after that, our consultants will continue to provide support, keeping you up to date on interest rates, refurbishment loans, and follow-up financing.
Purpose and application of real estate financing
The decision to build or buy a home is a fundamental one. One of the first points to be clarified here is the question of financing, because it is rather seldom the case that a real estate buyer or house builder has the necessary reserves to bear the costs completely independently. In this case, real estate financing takes effect and acts as support.
With a few exceptions, this has basically the same characteristics and functions as a regular loan or credit. As a future real estate owner, you will receive funds from your bank. These are repaid over a long period in the form of an installment including interest. The construction financing has a special feature, as the land charge is entered in the land register. This is the state register, which performs an administrative function for all property rights. The registered property serves as security for the bank if the installments are not paid. In addition, the real estate loan is provided with the stipulation that it be used exclusively to cover the costs of acquiring or building residential property – it is therefore not freely usable.
Advice and support for your real estate financing
Irrespective of whether you have already made a decision for a specific property, we are at your side with our broad specialist knowledge and comprehensive experience as a competent contact partner if you would like to find out more about real estate financing. Our experts from a total of 300 independent banks provide comprehensive information on all eventualities, possible difficulties and answers to all questions. With one of our expert advisors, you will discuss your financial options and whether you are eligible for state funding. During the consultation, all forms of real estate financing are closely examined in order to develop a financing strategy tailored to your individual situation. If you have your own ideas and visions, these will of course be taken into account and taken into account in the design of the financing. The aim of the consulting offer is to provide you with several financing offers that are optimally suited to your needs. In cooperation with the specialist advisor, you will sound out the advantages and disadvantages in order to find the ideal form of construction financing step by step. Our expert has an advisory function – the decision remains with you.
Once you have selected a form of real estate financing, the advisor will assist you with all application formalities and work with you to compile the necessary documents to be submitted to the bank. If the bank reviews the application and approves it, you will receive the contract documents, which you check with the expert and clarify any remaining questions. When you sign the contract, the real estate financing is secured. In addition, our expert advisor will be at your side to answer any questions you may have regarding the loan. He will advise you on instalment and modernisation loans as well as on the follow-up financing of the property.
What does a property loan cover?
The cost of financing a property depends on the terms of the construction loan. Note the mortgage interest, which is a monthly fee charged by the borrower to the bank. In addition, the fixed interest rate also plays a central role. The interest rate must remain constant throughout the term of the contract and may not be changed by you or the bank.
Optimal interest rates for property purchases
Because interest rates are currently so low, it makes sense to opt for a fixed interest rate over a long period of time. That way, you can take advantage of the low rates for as long as possible – up to 30 years. When interest rates are higher, it’s better to choose a shorter loan duration of five to 15 years in case rates should drop again in the near future. Repayment instalments – that is, the monthly amounts you transfer to your bank to pay off the loan – are another important aspect to consider when you take out a property loan. The higher the repayment rate, the quicker you’ll pay off the loan. The total monthly amount you’ll pay to your bank is the sum of the monthly principal rate plus interest charges. Many banks offer so-called annuity loans, whereby the borrower’s monthly payment amount remains constant, but the ratio between interest and repayment fees changes – specifically, the repayment amount steadily increases as each repayment reduces residual debt, thereby lowering interest payments.
Unscheduled loan repayments
An unscheduled loan repayment can be a smart and sensible option; if you ever have the ability to exploit it, you should definitely bring that up with your bank. These special loan repayments come into play if you experience an unexpected increase in personal funds – through an inheritance, for example, or a bonus at work – and would like to use these funds to accelerate your loan repayments. When you make an unscheduled loan payment, you reduce your residual debt, shifting the relationship between interest and repayment amounts and thereby accelerating your repayment.
How interest rates influence repayment
The interest rate is a crucial factor in determining the amortisation period for your loan, especially if it’s an annuity loan, whereby your total monthly repayment instalment is fixed. Because your residual debt starts to decrease with your very first repayment, the interest rate – which is calculated on the basis of the residual debt – will also change. This means that with every repayment you make, you decrease the portion of your monthly repayment that goes to interest while increasing the portion that goes to actual repayment of the loan. If interest rates are low, the interest share will decrease at a slower pace than it would if the rates were higher. By the same token, the repayment share will go up at a slower pace. As a result, it will take longer to pay off your loan. That’s why it’s smart to make the most of the currently low interest rates by agreeing with your bank on a high initial repayment rate.
An example might help illuminate this point. Say you take out a loan of €100,000 during a period of high interest rates – around 10 percent. If you choose an initial repayment rate of one percent, . This is a considerable monthly sum to be sure, but the upside is that you will have paid off your loan after 21 years. If, on the other hand, the interest rate is low – let’s say two percent – and your initial repayment rate is again set at one percent, it would suddenly take 55 years to pay off your loan. The point is: it’s crucial for your long-term financial planning to optimise the relationship between interest and repayment rates.
How your personal equity affects interest rates
Your available financial resources play an important role in determining interest rates. The more personal funds you can invest in your property purchase, the lower the interest rates on your loan. If you use your personal funds to cover only ancillary costs, relying on a loan to cover the actual property purchase, your interest rates will be higher than if you were to pay some of the actual purchase price out of pocket. Ideally, buyers can cover at least 40 percent of a property’s mortgage lending value from their own funds, as well as covering ancillary costs. The lending value is usually lower than the actual purchase price because it doesn’t include the safety margin included in the latter. In short, the terms of your loan will be most advantageous if you can invest at least half of the overall purchase price using personal funds.
Determining the optimal tenure for a property loan
The duration of a property loan is important because it directly influences monthly interest rates. A shorter loan tenure means a lower interest rate – 0.3 and 0.4 percent lower compared to loans that run for more than ten years. A longer tenure, on the other hand, is associated with higher interest rates. In other words, you should expect to pay between 0.3 and 0.4 percent more interest if your loan has a tenure of 15 years.
There are, however, potential pitfalls of a shorter loan period – an increase in interest rates, for example, with the result that you’re paying higher rates just a few years after taking out your loan. If interest rates fall, on the other hand, you could reap financial benefits. If you’d like to stay on the safe side, a long-term fixed-interest financing plan is the best choice.