Home Financing: The Biggest Mistakes - Part 1

One learns from mistakes. Unfortunately, this wisdom does not apply to mortgage lending . For there is rarely a second chance here, a misstep may mean the financial ruin of a family.

Whether it's an apartment, tenement or home - a property is an investment that pays off in the long run: using your own four walls will help Wealth Creation and at the same time provide the owner with the security of living peacefully at retirement age without having to pay rent. According to German tradition, the building loan is a relatively safe matter - both for debtors and creditors. Nevertheless, we want to clear a few mistakes at this point.

Real estate financing is also possible without equity

Wrong. Although German banks are again willing to fully finance their customers' dream home. However, the US example has shown how high the risks of full financing are. At this many people would come to the reckless idea to sell their house in an emergency and thus repay the loan completely. Even if it is for sale and the buyer pays the same as the house used to: What is missing are the real estate transfer tax, incidental costs, the brokerage fee and the notary and land registry costs.

In addition, the fact that the financing costs more , the lower the equity of the buyer. The banks include their personal risk in the conditions for each loan: accordingly, the lower the equity capital of the customer, the higher the bank's risk. This risk is borne by borrowers in the form of a interest premium .

Example : Who has over 30,000 euros of equity capital, which is to be used for ancillary costs, and wants to buy a house worth 300,000 euros, the currently pays at least 3.95 percent for his loan for a term of ten years. If the real estate buyer has 90,000 equity, the rate drops to 3.80 percent, at 150,000 euros, it is only 3.70 percent. Although these percentages are relatively small, the savings amount to several thousand euros over a period of ten years.

As a rule of thumb, at least 20 to 30 percent of the total costs for a house should come from its own pocket. Some banks even demand 40 percent.

The financial burden is reduced over the years

It sounds logical to laymen: Every euro with which the client pays off his loan melts the mountain of debt. The current load, however, does not become smaller. Builders and home buyers often finance their property with an annuity loan. During the entire fixed interest period, the debtor pays a constant sum for repayment and interest. Over the years, the interest portion decreases, while the repayment portion increases. After five or ten years, after the agreed fixed-interest period has expired, a significant part of the debt has been repaid.

Builders hope at this time that the new rates for the follow-up loan will be noticeably smaller. Not correct! It does not have to be that way. If interest rates are higher at the time of new financing than a few years ago, when the loan was drawn down, then the monthly burden may even be higher .

Example : For a loan in the amount Of 150,000 euros, with a term of ten years and a borrowing rate of 3.65 percent, the borrower pays each month 706 euros for interest and amortization. In ten years, the interest rate is 6.50 percent, the loan costs in this case 808 euros per month.

The lowest interest rate is the main criterion for a loan

Granted, everyone looks at the price comparison for construction money initially on the interest rate. Many customers even know that the effective rate is very important. With the new Consumer Credit Directive (of June 11, 2010), banks are already allowed to use uncertain variable interest rates for the subsequent follow-up loan. This allows the effective interest rate to be pushed below the borrowing rate . As a benchmark, the effective interest rate thus loses some value, which can be changed again in the foreseeable future. The effective interest rate takes into account the amount of repayment, the duration of the fixed interest period, the timing of the settlement of principal and interest payments and processing or agency fees.

On the other hand, account maintenance fees, estimated costs or partial payment surcharges and commitment interest are not included in the effective interest rate. This is why the offer with the lowest effective interest rate does not have to be the cheapest. In the comparison, interested parties should thus calculate the remaining debt , that is, what ultimately remains at the end of the interest payment on debts. At this point, the conclusion of a residual debt insurance would not be a bad idea.

Further errors on mortgage lending can be found here in the second part of our guide.

Artikelbild: © David Koscheck / Shutterstock


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