Taking out a real estate loan is a major financial decision – and one that is usually not made a second time. Many people who would like to fulfill their dream of owning their own home or who would like to provide for their old age with an investment in the form of a condominium, but who previously had little to do with real estate, should first carefully consider what needs to be taken into account when taking out a real estate loan.
Find out what is important for you, what the current terms and conditions are and other tips on real estate loans here!
What is a real estate loan and what do I need it for?
What is a real estate loan and how does it differ from a conventional loan?
The definition of a real estate loan is as follows: Money borrowed via a real estate loan may not be used at will, but is earmarked for a specific purpose and can therefore only be used by the debtor for the purchase, construction, refurbishment or renovation of real estate, i.e. apartments or houses. In any case, real estate loans amount to at least 50,000 euros.
When taking out a real estate loan, you can particularly enjoy the low interest rates – however, the bank usually secures itself with a mortgage or land charge. In contrast to other forms of credit, you do not pay off your debt over 1, 2 or 3 years – the term for real estate loans can be several decades – whereby a distinction is made between a term for the entire repayment of the loan and the fixed borrowing rate. Most banks offer terms of 10, 15, 20, 30 and 40 years for real estate loans.
How do real estate loans work?
Basically, real estate loans work like installment loans. If you opt for a full repayment loan, both terms are the same, meaning that the entire loan is paid off at the end of the term.
However, most property loans are annuity loans, which also have a fixed term, but the amount is usually not paid off by the end of the term and a residual debt remains, which you continue to pay off either from your own funds, via follow-up financing or debt restructuring. The monthly installment remains the same during the fixed period, but can change afterwards.
The repayment rate for property loans is usually between 2 and 3 percent – but it is also possible not to pay off the debt during the term, but to pay only the interest each month. The repayment-free loan is paid in one go at the end and is a good option, for example, if you want to finance your property loan with the sale of another property but the time of purchase is before the time of sale.
A home loan and savings contract adds another component to the contract for the real estate loan – the property is only financed once enough money has been paid in.
To ensure that they get the money back from you, your bank requires security when taking out a real estate loan, be it in the form of a land charge, mortgage, life insurance or guarantee. If you get into payment difficulties, you can fall back on this.
What does a real estate loan cost me?
How much you ultimately pay for your property loan each month depends on the term, the repayment installment and the interest. The effective annual interest rate for real estate loans with a term of 10 years is currently between 0.9 and 1 percent. The longer the term, the higher the annual interest rate.
You cannot get a real estate loan without interest, no matter how high the amount is in the end. However, if your equity share increases, real estate loans with an effective annual interest rate well below 1 percent are definitely possible.
When taking out a real estate loan, you should also consider the additional costs, such as land transfer tax, notary and land registry fees or estate agent fees – these can amount to between 10 and 15 percent of the purchase price. You can find out more about ancillary costs here → (link to blogpost Selling a condominium – ancillary costs: documents, notary, estate agent, taxes & more)
Interest rates in particular are currently favorable, but you can assume that real estate loans could soon become a little more expensive – if the uncertainties associated with Corona lead to increased bankruptcies and layoffs, this could lead to higher risk premiums.
Tip: Compare interest rates
The basic rule is: always compare the offer from your house bank with other possible providers of real estate loans – because even small differences can amount to several thousand euros. When making a comparison, make sure that the general conditions are the same, i.e. that key data such as repayment or fixed interest rates remain the same, as these also ultimately affect the interest rate. As a rule, it is worth comparing the effective annual interest rate for real estate loans.
What is the fixed debit interest rate all about?
For loans without an entry in the land register, interest rates remain the same over the entire term, but the situation is different for real estate loans – these only remain the same for the contractually agreed period, the so-called fixed interest rate. Whether you choose a fixed interest rate of 10 years or 30 years is of decisive importance for the interest rate of a real estate loan.
Tip: Choose the right fixed-interest period
The longer the fixed interest rate, the more expensive the contract will be for you in the end. If interest rates are low but it looks like they will rise soon, it is worth taking a longer period for your property loan in order to benefit from them for as long as possible – conversely, if interest rates are high and are likely to fall, it is advisable to choose a shorter period.
How do I deal with the remaining debt on my real estate loan after the fixed borrowing rate ends?
If you have chosen an annuity loan for your property loan, you will have a residual debt at the end of the contractual term. Ideally, you will have sufficient savings to repay this directly – if not, you can continue to pay off this debt in the form of follow-up financing. Your bank will send you an offer no later than three months before the fixed interest rate expires, but it is worth looking into follow-up financing at an early stage to save on interest costs. Timing is crucial here, as the interest rates depend on the current building interest rates and the interest rate forecast.
You can also save money by rescheduling your loan with a new bank. This means that your debt is moved from one creditor to another, where you have the prospect of more favorable interest rates.
The point at which you can restructure your debt depends on how long you have already been living up to your real estate loan agreement and, if applicable, the length of time until the term expires. If the loan agreement has been in place for more than 10 years, you have a period of 6 months in which you can cancel and reschedule at any time. However, if it has been less than 5 years, you do not have the option of rescheduling. If there are still 5 years to 12 months until the fixed interest rate expires, you cannot cancel the loan, but you can take out a forward loan to pay off the remaining debt. If there are less than 12 months until the end of the contractual term, the forward loan is not possible – either you cancel the contract and reschedule your mortgage or extend the fixed interest rate with your bank.
How high should the repayment rate be?
Generally speaking, a high repayment rate means you will quickly be debt-free again, but the monthly financial burden of your real estate loan will also increase – find out what is within your means. In periods of low interest rates, however, you should not set the repayment rate too low, as this means that the interest portion only falls slowly and the repayment portion increases just as slowly – the term is significantly longer and at the end of the fixed-interest period there is still a high residual debt amount. In order not to exceed the time frame, it is advisable to choose repayment rates of 3 percent or more when interest rates are low.
Tip: Use special repayment
If, contrary to expectations, you have more money available than previously assumed, it is worth reducing your real estate loan with a special repayment and thus paying it off early. You can repay up to five percent free of charge. If you have not agreed a special repayment right but would still like to repay a large part or even the entire property loan, an early repayment fee will be charged. → link to blogpost (Early repayment penalty when selling a condominium: cases, calculation, avoidance)
How much equity do I need for real estate financing with a loan?
How much equity you use when financing with a property loan largely determines how high the risk of getting into financial difficulties is – because with little equity, the financial burden that you have to bear over the entire term increases. If you can already cover 20 percent of the purchase price plus the incidental costs incurred, i.e. around 30 percent of the total outlay, you are probably on the safe side. Nevertheless, 100 or 110 percent can also be financed via your real estate loan. You can find out how to proceed here
Tip: Using equity correctly
If you have enough savings to buy a house, banks will usually reward you with better interest rates – this includes cash as well as other financial assets, shares or existing property and land.
How much real estate loan can I get?
The amount of real estate loan you can expect depends heavily on your existing financial resources – in particular your net household income. Your salary and other income therefore determine the maximum amount of your real estate loan. On the other hand, the amount of funds required is decisive for the conditions of your real estate loan and whether you can afford it in the end.
Where or with whom can I get a real estate loan?
You have four options when it comes to where to get your real estate loan – you can either go directly to a bank, an insurance company, use an intermediary or access a personal loan, for example through a relative.
If you apply for your real estate loan at your house bank, you will probably be in a familiar environment, but you must expect that only the bank’s own products can be offered.
The conditions offered by insurance companies differ very little from those you receive from banks for your real estate loan – however, 100 percent financing is only possible through a bank.
An intermediary can make you several offers and – depending on which one you choose – receives a commission from the provider. Thanks to the broker’s expertise and the larger selection, you have a good chance of obtaining a more favorable real estate loan.
If you rely on a relative or another private person to take out a real estate loan, you have the advantage that your SCHUFA entry, for example, does not play a role or that no extensive collateral is required.
What documents do I need for a real estate loan?
To apply for a real estate loan, you will need a number of documents. These include the following:
- Identity card
- Proof of existing liabilities or loans
- Proof of your equity capital
- Proof of income
- All data on the property
In the case of pensioners and self-employed persons, information on pension payments, balance sheet and profit calculations or proof of health insurance are also requested – what else you need depends on the type of property, so get good advice in advance.
Tip: Take advantage of funding opportunities
In Germany, the purchase or construction of residential property is still eligible for financial assistance. So if you want to take out a real estate loan as a buyer or builder, you can benefit from low-interest loans. You can apply for up to 50,000 euros from the state development bank KfW at favorable conditions and agree a repayment-free phase at the beginning.
For energy-efficient refurbished properties, you have access to a further loan with even more favorable interest rates and a repayment subsidy from the state.
Frequently asked questions
Does a real estate loan bring tax advantages?
If you take out a real estate loan for a rented house or apartment, you can declare the total amount of interest as income-related expenses in your tax return. You can also deduct all other costs associated with the loan.
Can I get a real estate loan even if I have a negative credit entry?
If a real estate loan is possible despite a bad SCHUFA, you will have to expect higher interest rates for the financing.
Can several people take out a real estate loan together?
Several people can also take out a real estate loan together and even benefit from better conditions, as there is a lower risk of default for the bank.
Can I have several real estate loans at the same time?
As there is no legal limit on the number of loans you can take out, you can take out as many loans as you can repay at the same time.
Is it possible to transfer a real estate loan to another person or another property?
It is possible to transfer your real estate loan, but requires the consent of all contracting parties. The debt must be transferred in full and all rights and obligations must be transferred to the new borrower.
Are there also real estate loans with a volume of less than 50,000 euros?
There is no legal regulation that prescribes a minimum volume of 50,000 euros for real estate loans, but such a transaction is hardly worthwhile for banks and therefore real estate loans are usually only offered from 50,000.
What happens to real estate loans in the event of inflation?
In the event of inflation, borrowers benefit as the amount of the loan remains the same while the value of the money decreases.
What can you do if you can no longer pay the installments on your real estate loan?
In the worst-case scenario, you could face foreclosure if you are no longer able to service your property loan. It is therefore advisable to talk to your lender at an early stage in order to avoid such an eventuality.
Can you cancel a real estate loan and what is the right time to do so?
It is possible to terminate a real estate loan at any time – however, if you do so within 10 years of taking out the loan, you will have to pay an early repayment penalty to the bank. It is therefore advisable to only terminate after 10 years, as soon as the statutory special right of termination applies.
Is there really an obligation to make additional contributions for real estate loans?
In the event that the market value of the property should fall sharply, banks theoretically have the right to demand additional collateral, i.e. the debtor is obliged to make additional payments. The bank can demand the difference in the form of additional collateral, or if this is not provided, the property can be foreclosed.
In reality, however, as long as you are paying interest and repayments on your property loan, the bank would not benefit from selling the property at a low price and therefore this right is rarely exercised.
