If you want to finance your own house or apartment, saving money usually does not help much. Here it makes sense to apply for mortgage lending. These are special loans, which are usually characterized by high sums and long maturities. Especially the longevity of mortgage lending has it all. Therefore, it is advisable to inform yourself thoroughly about the desired financing and to weigh the conditions carefully.

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Mortgage lending definition

Mortgage lending is often called “real estate financing” or “construction loan”. Mortgage lending is a construction loan that is earmarked for specific purposes: the loan may therefore only be used for construction measures such as new construction or conversion or the purchase of real estate. For some banks, modernization or refurbishment measures (see modernization loan) are also guaranteed. The most common form of mortgage lending is the annuity loan.

Mortgage lending, however, differs not only in the amount of loans and the duration of normal loans, but also in their form of hedging: a conventional installment loan is only covered by the borrower’s income. Unlike a mortgage lending, here it is necessary to secure the loan on the property itself.

As a security therefore a mortgage or mortgage is entered in the land register of the building. If the borrower is unable to pay the amount owed, the lending bank may foreclose the property in order to settle the outstanding loan over the sales amount.

What is an annuity loan?

An annuity loan is a loan with regular, ie constant, repayments (installments). The amount of installments that must be paid on a monthly basis remains the same for the entire life of the loan, provided that a fixed interest period has been agreed. Not like the repayment loan, where the amount of installments changes over time. The annuity rate (annuity) is calculated from the interest portion and the repayment portion. The redemption amount corresponds to a fixed part of the loan amount.

Although the level of annuity remains constant, within the monthly rate, the distribution of interest and principal changes over time. That’s because a small portion of the loan is paid from the beginning. As a result, this reduces the residual debt and, consequently, the associated interest expense. Within the monthly rate so more and more room for the repayment portion remains. If the financing is backed by a home savings contract, the amount of the amount is reduced by the credit interest of the Bauspar contract, which thus represents an additional repayment of the loan amount by the Bauspar.

Calculation example for mortgage lending:

  1. A mortgage of 150,000 euros is completed at an interest rate of 3 percent.
  2. The initial redemption amount is 2 percent annually. The monthly rate is 625 euros.
  3. The first installment consists of 375 Euro interest and 250 Euro repayment.
  4. After 10 years – when the total interest has been reduced due to the constant repayment of the debt load – the interest portion is only about 288 euros, the repayment share, however, has risen to around 336 euros.

Finishing mortgage lending – this must be considered concretely!

The amount of the loan to be repaid is made up of the sum of the loan and the interest costs. In order to be able to compare financing offers with each other, you must, of course, keep an eye on the total expenditure determined.

Nevertheless, there are other factors to consider when deciding: maturity, fixed interest period, special payment options, and flexibility of payment. When selecting offers, it is important to estimate what factors are most important to you.

1) How much equity do you need?

Equity has an important role to play in keeping the loan amount – and thus the interest rate – as low as possible. Normally, equity capital of 20 percent of the purchase price or the construction costs is recommended in order to have chances of obtaining a building loan from the bank. A large part of the equity capital must be budgeted for incidental expenses, for example the brokerage commission, the land transfer tax or notary and court costs.

2) Which debit interest is useful for mortgage lending?

The interest payable by the debtor varies according to the interest rate. At the conclusion of the loan, the interest may be fixed for between 5 and 20 years depending on the market situation and the financial situation of the borrower.

In most situations, a long term interest rate commitment is preferable. A short fixed interest payment is profitable only if a significant portion of the loan can be repaid within the first 5 years. In low interest rates, it always makes sense to fix the fixed interest rate as long as possible.

3) Choose the correct repayment term for mortgage lending

The advantage of having a short repayment term is the low interest cost that has to be paid on a monthly basis and, of course, that borrowers are quickly out of debt. Of course, with a short repayment term, the installments are higher. The longer the loan term is chosen, the higher the total amount of the loan will be, since interest rates have to be paid over a longer period.

Again, monthly interest rates are lower, which keeps the monthly burden on the borrower lower. Thus, in the ideal case, the debtor still has enough leeway to bear unexpected costs. Usually, the repayment term is therefore 20 to 30 years.

4) Consider special payments for mortgage lending

When concluding the loan, you should take into account that the option of special payment should be guaranteed, as this may significantly affect the cost of mortgage lending. With the help of special repayments, the loan debt can be paid faster and the borrower can disproportionately benefit from savings in interest due to the compound interest effect.

For most banks, it is common for approximately 5 percent of the loan to be repaid per year. However, in most cases, these annual quotas can not be carried over to the following year if the special repayment can not be used in one year.

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