In most cases, a property is not purchased using equity alone. A loan is taken out to pay the purchase price. This must then be repaid to the bank. In this article, you will find out what you need to look out for when searching for the right loan. How high can the loan be? What additional costs must be calculated on the purchase price of the property? Can you receive a subsidy from the state to help you fulfill your dream of owning your own home? These are some of the important questions that we will get to the bottom of in this article.
Would you like to know what financing options are available and how they differ? Then we recommend our detailed article on mortgages, loans, building society savings contracts and more.
Our tips for real estate financing
If you want to buy a property, you need to plan this step carefully. It is an important step that is associated with great anticipation. At the same time, a potential homeowner is confronted with several stumbling blocks. The better and more detailed the planning is, the smoother and less complicated the actual purchase process will be. For this reason, it is worth making some important considerations in advance. This way, hurdles can be identified and avoided at an early stage.
We explain the tips and tricks you can use to avoid nasty surprises when buying a house. In this way, you can purchase your dream property in a relaxed, informed buying process.
Realistically assess your financial capacity
Many people who want to fulfill their dream of owning their own home overestimate their financial resources. High costs are incurred, especially in the early stages. These include items that are only due once. However, the ongoing costs required to maintain the property should also not be underestimated.
Determine how high the monthly installment you will pay for your loan may be. Don’t forget to list all your expenses in a clear table. Your income should also be included in this step. Of course, you can only base the calculation of the loan installment payable on figures that you can guarantee. You should not speculate when buying a house, because then chaos is inevitable later on. A general rule of thumb is that the loan installment should never be higher than 40 percent of your net income. You can find budget calculators and household calculators on the Internet, but you can also easily create an overview yourself. You can use the following table as a guide:
If you offset these cost areas against your reliable income, you will know how much you can spend on a loan and other costs each month. Don’t forget the items that are due once a year in your cost breakdown. You must divide the total amount over the 12 months of the year in order to calculate the monthly amount to be paid.
When considering your financing requirements, also think about the ancillary costs
The viewing with the surveyor has taken place and you have decided to buy the condominium. Once you have deposited the reservation with the estate agent, the purchase process begins. We explain how you can benefit from a home buying consultation during the purchase process:
Examination of the purchase contract and other documents
In addition, you should not forget that although you no longer have to pay rent after buying your own home, you will have to reckon with other ancillary costs. These include, for example, repairs to maintain the condition of the house. There are also property management fees, home insurance and other reserves. The installments on your loan must therefore not exhaust your entire payment capacity.
Buying a house also involves one-off payments. In addition to the ongoing ancillary costs, there are therefore also the ancillary costs of completing the purchase. These include, for example, notary fees or fees for entry in the land register. You can find a detailed list of the additional costs you will incur when buying a house or apartment in this article.
Use your equity correctly
It is an advantage if you use your equity prudently. You should not just focus on the purchase price of the property. During the purchase process, it is also important to pay the ancillary purchase costs. These include estate agent fees, land transfer tax, land registry costs and notary fees. You should definitely pay these expenses from your equity. If you also have savings that can be invested in the purchase of the property, all the better.
The loan amount you need to buy a property is significantly reduced by using your own capital. This automatically reduces the interest you have to pay on the loan. For this reason, it is a good idea to put as much equity as possible into the purchase of the property. Financial experts advise you to always put two to three months’ net salary on the high edge so that you are not left without funds in the event of an emergency.
Compare different financing offers
Banks are constantly competing for their customers. When they invest their money, they often even receive a negative interest rate. For this reason, it is advantageous for banks to lend the money. Naturally, they earn interest for this service. Even if the banks seem to outdo each other with their offers on the Internet, the conditions of the individual credit institutions differ greatly. It is therefore very important to obtain several offers and compare them in detail. In doing so, you should not necessarily only respond to advertisements placed by credit institutions. The specific conditions for a loan are particularly important. These are based on your personal situation and the collateral you can guarantee the bank. The more secure you are as a customer, the lower the interest you will have to pay.
It is usually free of charge to obtain a personal offer from a bank. However, the bank will need some documents from you:
- Proof of income
- Proof of existing loans or other financial obligations
- Proof of equity
- Copy of the identity card
- Documents relating to the property (calculation of living space, calculation of construction costs, extract from the land register, purchase price, building description)
Pay attention to the details when comparing individual loan offers. The small print plays an important role in loan agreements. The optimal loan is not only characterized by low interest rates, but also by other advantages.
Secure low interest rates for the long term
The interest rate on loans can be fixed or flexible. If the conditions of your bank’s offer are outstanding and you are offered a low interest rate, it is worth having it fixed. With most contracts, the interest rate is secured for 15 years. In this way, you can protect yourself against an unforeseeable rise in interest rates in the coming years and have calculation security. It is particularly good if you have paid off your entire loan at the end of the fixed interest period. This is called a full repayment loan. With this approach, you don’t have to worry during the term of the loan about how high the interest rate will be after the fixed interest rate expires. This is because you will have already repaid the entire loan at this point and will therefore be debt-free. If it is not possible to pay off the loan in this period, it is recommended that you make as high an initial repayment as possible. In this way, you will pay off the loan amount more quickly and will only owe a small amount of money when you recalculate after the fixed interest period has expired.
Check state funding options
Under certain conditions, house and apartment owners can take advantage of state support when purchasing or renovating a property. This involves direct grants as well as reduced-interest loans and loans with repayment subsidies. Primarily families with a low income are supported on their way to home ownership. In addition, the state provides funding for renovation work that increases the energy efficiency of a property.
You can find out about the various funding opportunities from the following institutes:
- BAFA: If you want to install a new heating system or carry out other energy-related renovation measures, you can contact the Federal Office of Economics and Export Control.
- KfW: The home ownership program provides support for potential homeowners. You can apply for direct grants and loans with favorable conditions from the federal development bank.
- Development banks of the federal states: In addition to the federal development bank, each federal state has its own development banks. If your family income is below the prescribed limit, you can obtain a loan with favorable interest rates from these banks.
Repay your loan faster with flexible loan conditions
As already mentioned, the small print in a loan agreement is very important. Many banks offer their customers loans with a fixed repayment amount. This gives the customer the advantage of a fixed interest rate. At the same time, the banks want to be able to rely on the payment of a certain amount of interest. Flexible loans allow unscheduled repayments, which means a loss of interest for the bank. If you pay off your loan within a shorter period of time by making special payments, you will pay the bank less interest overall. For this reason, it is important that you pay attention to how high your unscheduled repayments may be when concluding the loan agreement. If you repay the loan earlier, for example because you have received an inheritance, you will have to pay a prepayment penalty. Although you will then no longer have any monthly loan payments, you will have to pay your bank a sometimes considerable sum as compensation for the loss of interest.
It is almost impossible to plan your current living costs and income for a long period of time in advance. You may receive a pay rise in a few years’ time and would then be able to pay a higher monthly installment on your loan. Alternatively, you may decide to save the surplus money and make a one-off payment towards the loan. There are two common clauses that are often used in loan agreements to give the customer a greater degree of flexibility:
- Repayment rate change: Some credit institutions allow their customers to change the repayment portion of the installment payments even during the fixed debit interest period. In this way, the monthly payments can be reduced or increased.
- Special repayments: Special payments are not normally planned when financing a property. However, despite a long loan term and a fixed interest rate, you want to be able to make special payments. This is why it is discussed with the bank before the loan agreement is signed that you may make special repayments. As a rule, these are payments that may be made once a year and may not exceed a fixed percentage of the loan amount.
Conclusion
At first glance, financing a property seems like a tangled jungle. But it is surprising how effective a few pragmatic tips can be when looking for the right financing option. If you thoroughly analyze and compare the specific conditions of different offers, you will be taking a huge step in the right direction. Make sure you secure a low interest rate for the loan in the long term. Additional flexibility in the form of special repayments or repayment rate changes offer a high degree of freedom of choice. Choose the bank that guarantees you a loan with unbeatable conditions. It is also important that you realistically assess your financial possibilities. Contrary to what you might expect, a list of your monthly income and expenditure can be drawn up within a short space of time.
We wish you every success in your search for your dream property and the entire purchase process. If you have any questions, our team of experts will be happy to assist you at any time.
