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Blog | 30. März 2017

BUYING A HOME: THE ABCS OF FINANCING

Financing a property purchase is complicated. Building-society and fixed-interest mortgages, variable and repayment loans – the list of financial products offered by banks and insurers is long and confusing. Novices can easily get bogged down in the details and have their dream of owning their own home quickly spiral into a nightmare. Private mortgage borrowers should therefore follow the golden rule – keep it as simple as you possible can! The more complicated the mortgage, the greater the potential pitfalls.

BORROWER BEWARE!

A combination mortgage with indirect repayments? Probably best avoided. There’s simply too much that could go wrong. A standard, fixed-rate mortgage is combined with a savings and loan agreement (Bausparvertrag) or an equity fund savings plan. The mortgage loan and savings plan both run for the same length of time. Borrowers make payments to cover the interest on their mortgage, but don’t repay any of the loan capital. At the same time, they pay a fixed amount into their savings plan every month. At the end of the agreed period, the capital paid into the savings plan is used to repay the mortgage loan. With an equity fund savings plan, borrowers can benefit from stock market gains – the equity in their savings plan could even be more than they need to repay their loan. But if the markets fall, stocks can lose a significant amount of their value and there may not be enough equity to repay the loan. Worst case: The borrower needs to take out another loan.

Borrowers do not face this risk if they take out a combination mortgage with a Bausparvertrag. But banks often charge an upfront fee equivalent to one percent of the value of the loan sum. Bad news for borrowers in the current low interest rate climate. At an interest rate of 0.1 percent, the upfront fee is actually higher than the amount of interest charged over the entire term of the loan. And that’s not all. In many cases, the interest charged on combined mortgages is well above average. Because the loan is only repaid at the very end, interest accrues on the entire amount year in, year out.

BE DEBT-FREE QUICKER WITH HIGHER REPAYMENTS

Which brings us to standard annuity loans. Here, borrowers start to repay their loan from day one. With fixed monthly payments, the amount of the loan capital a borrower repays increases over time as the residual loan amount decreases. And the higher the monthly payment, the quicker the debt is cleared. With this type of mortgage, all that needs to be agreed is the rate at which a borrower wants to repay their loan, the interest rate and the length of the mortgage. This makes it easy to compare mortgage offers from a range of different lenders. The most important factor to consider when making a decision: In the case of offers with identical maturity dates, pick the one with the lowest monthly payment and residual loan amount.

Annuity loans also offer shield borrowers from any future interest rate rises. They offer flexibility in terms of the length of the mortgage – and contracts can be cancelled after ten years. It’s even possible to agree a full repayment mortgage. This involves agreeing everything upfront – the mortgage’s maturity date and the interest rate for the entire term of the loan. But the longer the fixed interest rate, the more expensive the mortgage will be. Especially now, many borrowers are attracted by the supposed security of a very long-term, but comparatively expensive, mortgage. In fact, finance experts say it makes more sense to increase the amount being repaid each month than to pay higher interest rates on a longer-term mortgage. Borrowers are well advised to repay at least three percent of their loan per year to limit the risk of any nasty surprises caused by potentially higher interest rates when they need to arrange follow-on financing.

STRICTER LENDING CRITERIA FOR PRIVATE BUILDING LOANS

In general, it has become more difficult to get a loan at all. New mortgage lending regulations, designed to prevent private borrowers from becoming over-indebted, require lenders to carry out more stringent upfront checks to make sure that a borrower will be able to afford all of their loan and interest payments. This involves greater exposure for banks if a borrower is unable to meet their repayment commitments. In response, banks have raised the hurdles for borrowers. Above all, this has had a huge impact on young, single income families. People who have reached a certain age are also finding it more difficult to get a loan. From the data it is already clear: Since the new regulations came into force, the number of loans agreed with borrowers aged between 40 and 50 has fallen by around six percent, and for those aged between 50 and 60, lending is down by just below four percent. There has been an even steeper decline in lending to borrowers aged between 60 and 70, with the number of loans tumbling by almost 13 percent.

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Blog | 30. März 2017

BUYING A HOME: THE ABCS OF FINANCING

Financing a property purchase is complicated. Building-society and fixed-interest mortgages, variable and repayment loans – the list of financial products offered by banks and insurers is long and confusing. Novices can easily get bogged down in the details and have their dream of owning their own home quickly spiral into a nightmare. Private mortgage borrowers should therefore follow the golden rule – keep it as simple as you possible can! The more complicated the mortgage, the greater the potential pitfalls.

BORROWER BEWARE!

A combination mortgage with indirect repayments? Probably best avoided. There’s simply too much that could go wrong. A standard, fixed-rate mortgage is combined with a savings and loan agreement (Bausparvertrag) or an equity fund savings plan. The mortgage loan and savings plan both run for the same length of time. Borrowers make payments to cover the interest on their mortgage, but don’t repay any of the loan capital. At the same time, they pay a fixed amount into their savings plan every month. At the end of the agreed period, the capital paid into the savings plan is used to repay the mortgage loan. With an equity fund savings plan, borrowers can benefit from stock market gains – the equity in their savings plan could even be more than they need to repay their loan. But if the markets fall, stocks can lose a significant amount of their value and there may not be enough equity to repay the loan. Worst case: The borrower needs to take out another loan.

Borrowers do not face this risk if they take out a combination mortgage with a Bausparvertrag. But banks often charge an upfront fee equivalent to one percent of the value of the loan sum. Bad news for borrowers in the current low interest rate climate. At an interest rate of 0.1 percent, the upfront fee is actually higher than the amount of interest charged over the entire term of the loan. And that’s not all. In many cases, the interest charged on combined mortgages is well above average. Because the loan is only repaid at the very end, interest accrues on the entire amount year in, year out.

BE DEBT-FREE QUICKER WITH HIGHER REPAYMENTS

Which brings us to standard annuity loans. Here, borrowers start to repay their loan from day one. With fixed monthly payments, the amount of the loan capital a borrower repays increases over time as the residual loan amount decreases. And the higher the monthly payment, the quicker the debt is cleared. With this type of mortgage, all that needs to be agreed is the rate at which a borrower wants to repay their loan, the interest rate and the length of the mortgage. This makes it easy to compare mortgage offers from a range of different lenders. The most important factor to consider when making a decision: In the case of offers with identical maturity dates, pick the one with the lowest monthly payment and residual loan amount.

Annuity loans also offer shield borrowers from any future interest rate rises. They offer flexibility in terms of the length of the mortgage – and contracts can be cancelled after ten years. It’s even possible to agree a full repayment mortgage. This involves agreeing everything upfront – the mortgage’s maturity date and the interest rate for the entire term of the loan. But the longer the fixed interest rate, the more expensive the mortgage will be. Especially now, many borrowers are attracted by the supposed security of a very long-term, but comparatively expensive, mortgage. In fact, finance experts say it makes more sense to increase the amount being repaid each month than to pay higher interest rates on a longer-term mortgage. Borrowers are well advised to repay at least three percent of their loan per year to limit the risk of any nasty surprises caused by potentially higher interest rates when they need to arrange follow-on financing.

STRICTER LENDING CRITERIA FOR PRIVATE BUILDING LOANS

In general, it has become more difficult to get a loan at all. New mortgage lending regulations, designed to prevent private borrowers from becoming over-indebted, require lenders to carry out more stringent upfront checks to make sure that a borrower will be able to afford all of their loan and interest payments. This involves greater exposure for banks if a borrower is unable to meet their repayment commitments. In response, banks have raised the hurdles for borrowers. Above all, this has had a huge impact on young, single income families. People who have reached a certain age are also finding it more difficult to get a loan. From the data it is already clear: Since the new regulations came into force, the number of loans agreed with borrowers aged between 40 and 50 has fallen by around six percent, and for those aged between 50 and 60, lending is down by just below four percent. There has been an even steeper decline in lending to borrowers aged between 60 and 70, with the number of loans tumbling by almost 13 percent.

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