If you want to fulfill your dream of owning a home and want to take out a loan to finance your home purchase, there are many questions that need to be answered. At Cream Credit you will find an introduction and you can use various financing calculators to examine the key data for your home purchase. Once the loan details are available, you can send a query to Cream Credit’s mortgage experts, examine hundreds of banks and savings banks, and find the cheapest non-binding offer for you.
What is mortgage lending?
Whether buying a house, building project or buying an apartment: If you want to buy a property, you rarely do without building finance. With this type of financing, the property is mortgaged and is used as security for the lender. Building finance is also available for extensive modernization measures.
Only a few banks offer mortgage lending that covers the entire purchase price. Buyers must be able to pay a certain share from equity. Usually 20 percent plus incidental acquisition costs are required. The ancillary costs vary widely, as a rough guideline a further 10 percent of the purchase price is often taken. The notary and land registry cost calculator offers a calculation aid.
If you do not have 30 percent of the purchase amount in the call money account, you can also use other sources of equity, such as building savings, relatives and employer loans or life and pension insurance policies that can be assigned to the bank.
Fixed interest rate
Because mortgage lending is very large, it is typically amortized over several decades – often over 25 years or more. In contrast to an installment loan, the fixed interest rate does not have to be fixed for the entire term right from the start. Most of the time, the bank and borrower agree on a fixed interest period of 5 to 20 years. If it expires, they renegotiate the interest rate based on the current market situation – whereby the borrower can also switch banks. The longer the fixed interest rate is chosen, the higher the interest rate will be, but the safer the repayment will be. The decisive factor for the choice of fixed interest rates should be the interest level: the lower the interest rate, the longer it should be fixed.
But even if construction interest rates are relatively high, it is important to take economic developments into account: If inflation is above average, there is a risk of further interest rate increases and a longer borrowing rate may be worthwhile.
If the inflation rate falls, an acquirer can safely assume that interest on mortgage lending will also decline in the medium term. In the case of rising inflation, loans are usually also more expensive. If the market demands a very high level of interest, but at the same time gives a very volatile picture, it is advisable to conclude a mortgage with variable interest. With a medium interest rate level with potential downwards, a cap loan with an interest rate cap offers a solution to hedge against rising mortgage rates, but at the same time benefit from interest rate cuts.
As long as it is not a full repayment loan, a residual debt remains at the end of the fixed interest period. In order to repay these, the client must take up follow-up financing. Borrowers have the choice of closing them with the old bank or changing providers.
In order to find good offers, borrowers should be active in good time before the end of the fixed interest period. Some of the financing banks send the follow-up financing offer so late that there is no time left to look around the market.
Many also shy away from carrying out follow-up financing through another institution in order to avoid the costs of deleting the land charge and re-ordering the land charge. In this case, the financial institutions are content with a notarized assignment of the land charge in favor of the new financing bank. This eliminates the entire workload, except for the way to the notary. The costs are also significantly lower.
The hope of follow-up financing is, of course, that the monthly installment will be lower in future due to the repayment already made. But if interest rates rise in the meantime, the rate can also rise. If the capital market is in an upward trend, the borrower has the option of securing follow-up financing through a forward loan at the current – probably more favorable – conditions. This special type of home finance can usually be concluded with a lead time of up to 36 months. Providers can pay for this security by paying slightly higher building rates. In a volatile market, however, forward loans should be avoided, since even if interest rates fall, the home loan must be taken out at the agreed conditions. Otherwise there is a risk of non-acceptance.
If the assets increase – such as an extraordinary bonus payment – builders can make a special repayment. This reduces the remaining debt and repays the loan earlier, which lowers the cost of real estate financing.
Many lenders do not offer special repayments free of charge, but instead charge a prepayment penalty. The prepayment penalty calculator helps determine their possible amount. The maximum amount of the special repayment per year also varies from bank to bank, but there is hardly more than ten percent of the remaining debt on the market.
The situation is similar with a change in the repayment amount. Some banks do not allow the repayment rate to be changed during fixed interest rates. Others allow it without fees, the third parties charge for this. If you have a strongly fluctuating income, you should, therefore, focus on offers that allow you to change the repayment rate without restrictions.
Term loans are usually taken out against life insurance that has been assigned to the bank. The borrower only pays the interest to the bank, repayment is made at the end of the insurance term by life insurance. This model was originally interesting for third-party rentals due to the constant high interest rates and thus advertising costs. However, due to the abolition of the tax privilege for life insurance and the extremely low guaranteed interest rate, term loans have lost much of their popularity and hardly pay off even with third-party rentals. In addition, with low interest rates on the capital market, the maturity rate becomes uncertain.
As an alternative to life insurance, final loans can also be taken out for example against bonds. In this case, the securities will also be assigned, the repayment will be made with the repayment of the bond amount by the issuer. This variant can be useful if the interest rate on the bonds is significantly higher than the home loan interest rate. Another variant would be, for example, final financing, which is offset by a savings plan in an open real estate fund. In this case, the borrower should not forget to cancel the savings plan two years before the loan is due, as the restrictions on open-ended real estate funds require a minimum holding period of two years. The installment payment must then end two years before the due date.
Buying a house or renting it?
Most Germans dream of owning their own property, especially as a pension. Nevertheless, the rate of homeowners in Germany is below the European average. In 2016, the Federal Republic was the penultimate place ahead of Switzerland with almost 52 percent. You can find out whether real estate financing or renting is more worthwhile for you with our purchase / rental calculator.