Mortgage Lending At A Glance

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With private construction finance you can finance your own property, for example a single-family house or a condominium. The prerequisite is that you use the property yourself and not rent it commercially.

There are three ways you can finance your property:

Equity: You use your cash, such as bank and savings balances, or your securities or shares, provided that they can be sold.

Own work: You are involved in the construction or renovation yourself. In this way you can reduce the total costs and thus also the capital requirements.

Borrowed capital: If you do not have enough equity capital, you can take out a loan from a bank or a private person, for example a relative.

Whenever you take out a mortgage loan from a credit institute or a building society, the contract contains the term , the interest and the registration of a land chargeagreed in the land register. With the land charge, the institute secures a right of access to the property if the borrower can no longer pay his installments or the remaining debt due. The loan interest is usually fixed for five, ten or 15 years, depending on the contract period. In recent years, contracts with fixed interest rates for a period of 20, 25 or 30 years have also been increasingly offered. But there is also construction financing with a variable interest rate, which depends on developments in the money market.

You usually repay the loan monthly in so-called annuity installments (annuity loan). In addition to the interest, the annuity rate also includes a repayment portion. During the whole term, the number of the instalments remains the same. The amount of the debt is lowered by annual repayments, meaning that the interest portion of the monthly payment is continuously decreased. Around the same time, the repayment portion is raised by the saved interest arising from a successive decrease in the amount of the debt.

If the loan amount is not fully repaid after the contractually agreed period, there are two options: Either you redeem the loan and pay back the remaining amount from your own funds, or you need follow-up financing . This means that you conclude a new loan agreement for the entire remaining amount or part of the amount. In addition to annuity loans, there is a fixed loan with a repayment replacement function, in which the loan is replaced by a life insurance or a building society loan agreement. With fixed loans, the monthly installments only consist of an interest component.

When can mortgage lending be useful for me?

The mortgage can help if the acquisition or construction of a house or a condominium plan. In doing so, you are also making a contribution to building up your private wealth or providing for your own retirement .

What are the risks?       

Business risk: In special situations, such as sudden unemployment, you may one day no longer be able to raise the monthly mortgage payments. Then the respective credit institute can initiate a compulsory sale, i.e. compulsorily auction a house or apartment.

Risk of follow-up financing: If you need follow-up financing, a follow-up contract will be concluded at the then applicable market rates.

For you, this can mean an interest rate risk: If, for example, the market interest rate has risen significantly after a loan period of ten or 15 years, the total cost of the remaining financing increases with the monthly loan installment. Instead of, for example, 1.7% effective interest, the interest on the follow-up financing could climb to 6.1% effective interest in the meantime.

Loss of value of the property: If you sell a house or apartment, the proceeds can be lower than the loan amount that is still to be repaid. This case usually occurs in the case of new buildings or properties that have been bought or built overpriced and where the financing amount exceeds the actual value of the property.

Availability of the property: If you sell the financed property but the loan has not yet been fully repaid, a loan with a fixed interest rate can usually only be redeemed against payment of a so-called early repayment penalty. With this claim, the bank offsets its loss of interest, namely the interest that it has lost.

How are the performance, profit and benefits of mortgage lending structured?             

In the loan contract, the customer agrees an interest rate for his mortgage, the so-called nominal interest rate . However, the contract must also state the higher effective interest rate that the customer actually pays. The nominal interest rate is based on the respective market interest rate, i.e. the refinancing rate of the banks, at the time the contract is concluded. It is fixed for the contractually agreed term – usually five, ten or 15 years – so it does not change. Further influenceIn addition to the market interest rate, factors such as the amount of equity capital, duration, amount of financing and collateral have on the loan rate. The interest on the follow-up financing is based on the then applicable market interest rate (see also the topic of risk: risk of follow-up financing ).

When comparing loan offers, you should always pay attention to the effective interest rate, as this indicates your actual burden. The effective interest rate must be mentioned in every offer.

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