Using home finance comparison »The Best Credit 2019.

When comparing budgets for home and farm, not only the interest must be the focus. This is certainly one of the most important criteria, but especially with long-term and high loans, as they are common when buying property, extras also play a role. For example, the possibility of special repayments or the duration of fixed interest.

We show how to use the real estate financing comparison correctly and make good loans. Because not only banks offer cheap loans, also building societies, insurance companies and credit intermediaries make good offers. At the same time, mortgages in the narrower sense of the word are uncommon today.

Instead, a mortgage is registered today.

Instead, a mortgage is registered today.

Whether mortgage or mortgage, the basic principle is the same in both cases: A property serves as collateral for the loan. If the loan can not be paid, the house or property can be auctioned off. The difference between the two forms is that a mortgage applies only to a specific loan.

A mortgage can later also serve to secure a new loan to the same bank. Only the total amount is fixed, for example 200,000 USD. Who still has a residual debt of 150,000 USD, can take a new loan in the amount of 50,000 USD, which is also secured by the mortgage, because the total amount remains within the limit of 200,000 USD.

Unlike the installment loan, the loan is thus secured. As a result, it is less the applicant’s credit rating that determines the level of interest than rather these factors:

  • Equity ratio,
  • Type of property,
  • Location of the property,
  • Duration of fixed interest
  • Total amount of the loan.

The equity in the financing comparison for house

The equity ratio is by far the most important criterion. The higher it is, the safer the loan is from the perspective of the bank. Because the financial institution is playing it safe. If the value of the house falls, there is still enough money to pay the debts. The greater the equity ratio, the lower the interest rate.

If, for example, 30 percent of the house price is financed from the savings, the value of the property can fall by around 30 percent and the bank still receives enough money from the foreclosure to pay the costs of the auction and pay off the debt, even if the borrower so far has not paid back a penny.

A high equity ratio reduces interest rates twice. Once, because you need less credit and in addition, because the interest rate is then lower.

From an equity ratio of 40 percent, the interest rates are usually very low and no longer decline with a higher share. Some banks generally require at least 10 or 20 percent equity. Those who do not have that much can often close the gap with subordinated loans such as the owner loan of the Hunx Bank or a normal installment loan. However, the interest rates for this form of loan are significantly higher. Meanwhile, many banks also offer 100% financing, in which the entire purchase price can be paid through a real estate loan.

Location and type of the property

The type and location may also play a role in real estate financing comparisons, especially with a low equity ratio. Economists and statisticians are trying to forecast price developments in certain areas and for certain real estate. If higher prices are expected for land, apartments and houses, then banks are also willing to accept a lower equity ratio.

For if the number of households in Hamburg sink again, such apartments should first be empty, because the residents move to more popular quarters. 

The type of property can also play a role. Detached houses and attractive apartments in good locations often react less strongly to price declines, because with higher vacancies the inhabitants of unattractive apartments move into better ones. When comparing financing for apartments, therefore, a different interest may come out than in the financial comparison for the home.

Overall, these two factors play a rather subordinate role, although there are always actions by banks, which also put the situation in the foreground. For example, the regional interest rate action of FING (formerly Metabank), in which the loan rate was lowered by up to 0.2 percentage points.

Rate fixing plays a big role

An almost as important role as the equity ratio is the duration of the fixed interest rate. Because currently, the interest rates are low, longer terms mean higher costs and greater risk for the bank. An increase in interest rates is likely in the coming years. But if the level of interest rates is long-term, the bank can not profit from it. Rather, she has to pay even higher interest rates to her customers, in the worst case more than she owns.

Interest rates are currently low, but that does not have to stay that way. That is why banks are demanding more money for a long-term interest rate. 

In order for this not to happen, the banks endeavor to lend money themselves in the long term, for example via bonds or time deposits with long maturities. However, this is more expensive for the bank, term deposits with a term of ten years are currently significantly higher interest rates than those with maturities of a few months.

Nevertheless, it has to finance a portion of short-term call deposits, such as money from savings accounts or credits borrowed from the ECB. For safety reasons, the bank is planning on using a buffer, ie it will only issue loans in periods of low interest rates if the interest rate for long maturities is significantly higher than the current one.

As a matter of principle, long-term loans are usually much more expensive than those with short ones, as banks value security. Only in periods of high interest rates can loans with long-term interest rates be cheaper.

Loan amount affects home loan comparison

The amount of the loan can also have an impact on interest rates – irrespective of the equity interest. A loan of $ 300,000 may be cheaper than one in excess of $ 100,000, even if in both cases 60 per cent is financed by credit and 40 per cent by equity. This is because a high loan in relation to the amount of funding makes less work.

With the Metabank the interest rate decreases with higher loan amount. Of course, this only applies if the equity ratio remains the same, here 40 percent. Simply take more money than you need is not a solution. Especially since not only the interest rate, but also the loan amount influences interest rates. 2.38 percent of 50,000 USD are less than 1.92 percent of 200,000 USD.

In other words, if the bank has to pass on 200,000 USD of savings, then it is less costly to lend a loan of 200,000 USD than four over 50,000 USD. In the past, banks solved the problem by demanding a processing fee. As a result, loans with a lower amount automatically became more expensive even with the same borrowing rate. These fees are now prohibited, therefore, the financial institutions often require higher interest rates for small amounts.

At Metabank real estate loans can only be raised from 50,000 USD. For smaller amounts, the bank offers the so-called home loan. It is dispensed with the land register entry, which reduces the processing costs. Even for borrowers, this variant can be cheaper for sums under 50,000 USD, because they then have to pay any fees for the land register entry.

CAX partly finance real estate.

Axa partly finance real estate.

Because the corporations have to invest a lot of money, for example, to pay their customers later a life insurance. However, they are obliged by law to handle the funds of their customers with particular care and therefore have to choose safe investment forms – and this includes real estate predominantly.

Small property loans. Often, this also includes on-site advice, so an employee comes to the customer’s home. Companies choose the cheapest among the offers from different banks and are therefore often not a bad choice.

 

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