Hamburg – Low interest rates on loans tempt many to raise high mortgages. But those who finance real estate entirely without equity should consider five possible sources of risk.


Image: Couple in front of the home 

1. Gross and net financing:

Speaking of full financing Experts, if the budding real estate owner receives a loan over 100 percent of the purchase price: Costs the house 350 000 Euro, the amount comes completely from the financial institution. That’s the net financing.

In addition, brokerage commission, notary fees, land register entry and land transfer tax must be taken into account. These costs make up to twelve percent of the purchase price. In addition, relocation, renovation and spending on new furniture are required. These items taken together correspond to the gross financing.

Anyone who wants to borrow the money for these additional expenses, requires significantly more than a 100-percent financing. Most banks either do not agree or require a risk premium in the form of higher lending rates. Michael Knobloch from the Institute for Financial Services (iff) in Hamburg therefore advises that at least the ancillary costs and the move out of equity be denied.

2. Term and repayment:

Whoever receives a lot of money stutters for a long time. With a 100 percent funding with only 1 percent repayment, it can take a long time for the mortgage to be paid off and the real estate owner finally in-house master. Christiane Kienitz, adviser for real estate financing at the consumer advisory Hessen, calculates: A loan of 150 000 € will be fixed over ten years. The effective interest rate is 1.5 percent per annum, the repayment rate is 1 percent. After 10 years, the remaining debt is still around 133 800 euros.

How long it takes for the loan to be fully repaid depends, among other things, on the interest rate then due on follow-up financing. If the remaining debt has to be paid 6 percent interest, Kienitz claims that the loan has a total term of more than 34 years. If the follow-on interest rate is 3.5 percent, the loan is repaid after almost 44 years. As long as the bank is in the land register.

The banks had responded to this situation: Meanwhile, the standard repayment has been increased to 2 percent to prevent extremely long maturities. “Anyone who wants to further optimize their financing, repays even higher or at least agreed special repayments.”

3. follow-up financing and price fluctuations:

Mortgage contracts usually set a fixed interest rate of ten years. If interest rates rise, it will be tight if full funding is granted by the end of the deadline. Because there was little repayment from the loan originally taken, the burden of debt reduction increases instead of falling as a result of the low level of debt relief. “High follow-up rate for follow-up financing,” Kienitz sums up the phenomenon. Priceless rates then bring many fully-funded property owners to the brink of ruin.

Michael Knobloch sees another risk in market price fluctuations. Falling real estate prices or depreciation could bring borrowers into trouble who have to leave their homes or leases during the repayment period. “They bought for 350,000 euros, but can only sell for 300,000 euros.” On the balance, the seller remains seated.

4. Early arrears and compensation:

Financial institutions can pay the early repayment of a loan expensive. You are legally entitled to a prepayment penalty if a fixed interest rate was agreed in the contract. This compensation can quickly be in the five-digit euro range.

This burdened with a full financing considerably: A acquired for 350 000 €, fully leveraged house is to be sold after just one year. Due to low repayment, the owner still stands with 348 000 euros in the chalk. The bank also demands a prepayment penalty of 15,000 euros. Below the line, the debt increases to 363 000 euros.

Missing the money for lack of savings, to pay the compensation out of pocket, a new – and more expensive – installment loan is required. Otherwise the house sales wobble. Knobloch: “The bank only gets out of the contract if the mortgage is canceled, which will only happen if there are no more debts.”

5. Validity and vicissitudes of life:

The low interest rates tempt to raise high mortgages. In the assumption “that’s alright”, some willing consumers are inclined to self-esteem, according to the Frankfurt financial adviser Max Herbst: “I live in a luxury apartment, then I buy a luxury apartment.” Opinions often differ as to whether the object is worth the money. While the borrower wants to flick for the dream apartment half a million euros on the table, the bank wants to grant only a loan over 400 000 €. In their view, this equates to 100 percent financing.

Divorce, children, job loss, illness: In a full financing every change in income beats immediately into the office. Anyone who has already pushed the limit with the rate usually no longer has a chance to absorb financial bottlenecks. Threatens then the emergency sale, the disaster is there.


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