Real estate - property, plant and equipment with added value
The sum is impressive: every year, according to an estimate by the official expert committees, apartments, houses and land change owners for billions of dollars. Some speak of a boom. The others from a bubble. In fact, prices in large German and also in many medium-sized cities have risen significantly in recent years. But the whole truth also belongs: For a long time, property prices in Germany were rather cheap by international comparison. So there was a certain need to catch up. To speak of a Germany-wide real estate bubble therefore seems exaggerated to me.
If you want to use your property yourself, you only need to be moderately interested in the discussion about boom or bubble. In view of the extremely low interest rates that you can lash down in the long term, you currently have a very good opportunity to buy a valuable property in a good location.
A property is an item of property, plant and equipment with added value. You can live in it, are independent of a landlord and build a solid pension. I expressly do not adopt the argument of brokers and sellers who rave about "rent-free living in old age". Rent-free may be true, but of course you have to expect housing costs and an undeniable amount of modernization and repair work. Because, together with you, your house or apartment will also "get on in years". But still: With a debt-free property, you have a solid economic pillar in retirement.
What can you do wrong with real estate financing?
Sometimes I am asked: "With these low interest rates, can you do anything wrong with mortgage lending?" And whether! Unfortunately, looking for the cheapest mortgage lender on the Internet and then fixing the interest over 15 or 20 years is not enough. The following questions must also be answered:
- How much equity should you bring in so that the financing is not "sewn on edge"?
- How high should the repayment rates be so that the property is in debt until retirement?
- What additional costs are incurred - and how can they perhaps be reduced?
- What is provisional interest, special repayments and prepayment penalty?
- What is the difference between the mortgage lending value and the lending limit?
- How is the land register structured and why does the bank insist on first-class protection?
- Would you consider a Volltilger loan?
- How do you secure a loan for follow-up financing in good time? And what should you do when things get tight financially?
You no longer need an 300 site that familiarizes you with every facet of mortgage lending. On the Internet you will find a wealth of important information with which you can individually enrich the basic knowledge conveyed in this booklet. Consider the text at hand as a kind of compass that can help you navigate to solid and individually tailored building finance.
How to determine your financing needs
Done: You have found a house or apartment that exactly matches your ideas and those of your family. The property is not exactly a bargain, but given the good facilities and the perfect location, the price is okay for you. Instead of paying rent as in all the past years, you are now building home ownership. Soon you will be independent of a landlord and can enjoy life in the proverbial home. First of all, however, it is important to bring the financing under one roof.
Because only very few contemporaries are in the fortunate position of being able to pay for a property solely from their own resources. For the vast majority of property buyers, it is rather the biggest investment of their life. The average net monthly income for full-time workers in Germany is just under 2.500 euros. So anyone who buys a property for 300.000 Euro would theoretically have to save their full net salary for ten years in order to be able to buy the property with their own funds. This is of course unrealistic, because after all you and your family need money for insurance, food, clothing, hobbies and vacation.
Let's make it short: Most property buyers and builders need outside capital. This is not a problem, and certainly not in times of very low interest rates. In addition, fierce competition among building finance providers and a number of court rulings have contributed to making the construction finance market much more consumer-friendly today than it was a few decades ago. And yet there are still numerous pitfalls that you should be aware of in order not to end up in financial difficulties.
The five commandments of home finance
Before we go deeper into the subject, I would like to introduce my five commandments to successful building financing. I will cover the topics raised in each of them in greater detail, but I would like to draw your attention to the essentials at this point:
- Commandment: Always calculate realistically. This applies to the assessment of your personal economic performance as well as to the actual costs of purchasing real estate. Do not underestimate the additional costs associated with the purchase and financing. You can find out what to expect in the second chapter.
- Bid: take the time to compare the offers of the numerous mortgage lenders. Nobody forces you to conclude your loan agreement with your house bank or the nearest savings bank. You should also not blindly follow a developer’s bank recommendation. But not only compare the amount of interest, but also the general conditions. You can find out more about this in the third chapter.
- Bid: Secure low interest rates in the long term. Loan contracts with 15 or 20 years are no longer uncommon these days. Such long-term contracts give you calculation security and reduce the risk of changes in interest rates with regard to follow-up financing. Again, please note the recommendations in the third chapter.
- Commandment: If possible, make special repayments. Suppose you inherit or are otherwise able to enjoy an unexpected monetary blessing. Before you think about buying equity funds, gold bars or any other form of investment, reduce the amount of debt from your home loan. Make sure that the bank allows you to make special repayments free of charge. You cannot claim interest on private loans for tax purposes (the situation is different when you rent out your property). It is therefore in your interest to repay your loan as soon as possible. Your property should be in debt at the latest when you retire.
- Commandment: Expect the worst case. It usually takes 20 or 30 years for a property to be released from debt - sometimes even longer. A lot can happen during this time. How you make provisions and what you do undertake If things get tight, you can find out in Chapter 5.
What is your equity?
In principle, you can fund 100 percent of your property. Some banks are willing to do so provided that customers have the appropriate credit rating, i.e. solvency. 100 percent financing can be useful, for example, if you have invested your equity in shares and the stock market is in a bear market at the time of the property purchase. If you would then sell your shares of all things, you would have to accept considerable price losses.
The better alternative: You initially finance 100 percent, but conclude two loan agreements - one with a long term (ten years or more) and one with a short term (about five years). Chances are that the share prices will have recovered by the short term until the loan agreement expires. After five years, you then redeem the small, short-term loan and thus retroactively bring in equity. You continue the long-term loan contract as normal. This strategy is also recommended if you expect a larger amount of money to be received in a few years (inheritance, life insurance expiry, severance payment or similar).
Real estate acquisition: from the exception to the rule
Let's move from the exception to the rule: Real estate buyers usually bring equity capital in Germany. This makes sense even in times of low interest rates, because the more equity you invest, the less debt (i.e. construction loans) you need. The financing costs are then correspondingly lower. In addition, you will then live in your own four walls more quickly, free of debt. Although there is no rule of thumb about how much equity you should ideally bring in, consumer advocates and finance experts recommend at least 20 percent of the property price. Equity capital of 30.000 Euro is normally the lower limit.
At the beginning of your financing concept, there should be a realistic drop in the cash register - even before you start looking for your dream property. Because once you have a chic apartment or a representative house in your heart at correspondingly high prices, you often tend to pay off. This means that the existing assets are over-optimistic. Even a slight rounding up can later lead to a financing gap of several thousand euros. Also keep in mind that each checkout is just a snapshot. Security deposits, foreign currency investments and precious metals are subject to significant price and price fluctuations. I therefore recommend that you apply safety discounts of between five percent for less volatile securities (bonds) and 15 to 20 percent for stocks, equity funds and gold.
The following checklist will help you determine your equity:
|Calculation of your equity||Remarks|
|Current account balances|
|Credit on investment accounts||Note notice periods|
|(Savings book, fixed deposit, overnight deposit account, etc.)|
|Endowment policy||only surrender value|
|Jewelry, antiques||Fair value on sale|
|Expected sales proceeds|
|Expected tax refunds|
|Donations / anticipated inheritances|
How much credit can you afford?
Now that you have calculated your equity, you know how high the financing requirement is. In the second step, you should therefore determine your long-term financial sustainability, i.e. how much credit can you afford? Here, too, it is important to calculate realistically and not just to take a snapshot. Your income and, if applicable, that of your partner may currently be quite good. But are you sure that this will be the case for years or even decades? It does not always have to be illnesses, other personal blows of fate or economic crises.
Also think about your personal family planning. If youngsters appear, there is at least a temporary loss of income. And everyone knows that children cost money. The state child benefit is hardly enough to compensate for this additional financial expense. So I recommend that you always use a safety margin of at least ten percent when calculating your financial scope in order to have a sufficient financial buffer. The following checklist gives you clues as to how you calculate your financial scope, which is available to service your building loan (i.e. interest plus repayment).
Calculate your financial scope
1. Household income per month
hh net income
hh net income partner
hh investment income (if still available after property purchase) hh other regular income
Total monthly net income …………………… .Euro
© of the title »Help! I'm buying a property «(978-3-89879-907-2)
2017 by FinanzBuch Verlag, Münchner Verlagsgruppe GmbH, Munich 15 For more information: http://www.finanzbuchverlag.de
1. How to determine your financing needs
2. Household expenses per month
hh Daily needs (food and drink)
hh Other household expenses
hh incidental housing costs
hh car, bus, train
hh Current loan commitments (except home loans) hh Maintenance commitments
hh Private old-age provision / savings contracts Total monthly expenses ………………… .. ………… .Euro
Monthly net income:
Minus monthly expenses:
Minus security discount (about 10%):
= free funds
Now you know the maximum load that you can carry each month. How much credit you can afford with it - i.e. your individual debt sustainability - naturally depends on the interest rate on your loan. The amount can be calculated using a simple formula. It is:
Maximum portable monthly load in euros × 12 months × 100 interest rate + repayment
If you do not want to use the calculator right away, the following table gives you a rough overview (the amounts are rounded):
|Maximum monthly rate you can afford||1,5 %||2,0 %||2,5 %||3,0 %|
Source: Own calculations
The alternative sources of money
Until a few years ago, it was quite common to look for alternative sources of money to reduce the amount of the building loan. Especially the own employer and close relatives were welcome as lenders. Of course, these are also loans. This means that the money from the boss or from close relatives must not be regarded as equity. Of course, you must also repay these loans with interest.
- In principle, some employers are willing to lend to committed service providers or experts who are difficult to get on the job market. This is especially true when business is booming and the company is in a healthy economic condition. However, as an employee, you are in an additional dependency relationship with your boss. If you leave the company, you will have to repay the loan.
- Particularly committed service providers or experts, who are rarely found on the job market, usually have very good cards for getting a loan from your employer, although experience shows that the willingness to do so decreases in economically difficult times. The employer hopes to bind the employee (i.e. borrower) more closely to the company. On the one hand, the employee should settle near the company, which usually reduces the willingness to change companies. Secondly, there is the obligation to repay the loan if the company leaves the company prematurely. In addition, the employer must use the market interest rate. If he escapes you too far, there can be trouble with the tax office. The Treasury may then demand taxation of the interest saved as a "monetary advantage," that is, as additional income.
- Friendship usually ends when it comes to money. This is what you should keep in mind when accepting a relative loan. It works similarly to the employer loan mentioned. You receive money on particularly favorable terms, and the lender is satisfied with subordinate protection in the land register. This is important insofar as the financing bank insists on first-class protection in the land register.
In times of very low interest rates, however, employer or relative loans make little sense, because these alternative sources of money are unlikely to be really cheaper. A different situation can arise, of course, if the interest rate for home loans rises significantly again. However, this is not to be expected in the short to medium term. However, these alternative sources of money can be interesting if your financing needs exceed the mortgage lending limit for the property you are considering. Then the mortgage lenders generally charge interest supplements. With the help of an employer or relative loan, you can keep the financing requirements below the loan limit.
Caution, money laundering!
Be on guard when a relative wants to pay you a loan in cash. I don't want to impose bad intentions on anyone, but it could be money laundering. The relative loan should therefore be transferred to your account and your relative must be able to provide a clear explanation of where the money comes from at any time. Otherwise, you and your seemingly generous relative may face tax punishment in the worst case.
Donations are a much better solution than anticipated inheritances. If you expect a larger inheritance from your parents anyway, you can have a portion of them donated now. In the context of the quite high allowances, you do not pay taxes on this gift. You also save interest and repayment. The tax-free allowance amounts to 400.000 euros per child and parent for gifts to children or stepchildren. So your parents can give you a total of 800.000 euros (each 400.000 euros from the mother and the father) without the tax authorities holding out their hands. In the case of complicated wealth constructions, however, it is advisable to consult a tax advisor or specialist lawyer in order to be on the safe side in any case.
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