"Concrete gold" - how can you finance real estate?
There are three options for financing the real estate: the annuity loan, the bullet loan, a building loan agreement and immediate building loan financing.
Annuity loan: a popular option
80% of Germans choose the annuity loan. With this method, you agree with the bank an interest rate and a redemption rate. So-called annuity (the amount) results together. You pay this amount over the entire term. If you always pay off part of the amount every month / every year, the loan and thus the interest on the loan decreases. The amount that you pay less interest on is used to redeem the total loan.
Example: For a loan of 150,000€, the interest would be 1.5% and the redemption 2%. In the first year you would pay 2.250€ interest plus 3.000€ redemption, that is 5.250€ or 437, 50€ monthly. In the second year the loan amount is only 150.000-3.300=146.700€ and thus the interest would amount to only 2.200, 50€. The redemption amount on the other hand would then rise to 5,250-2,200.50=3,049.50€. Important for this type of loan: agree on the interest rate with the bank on a long-term basis (e.g. 15-20 years). 1% more or less makes a big difference with these amounts. In addition, the redemption should be as high as possible. Because if at the end your loan is not paid off, you need a follow-up financing, which is usually more expensive (higher interest).
Tip: You can also agree on special rights of redemption and change the redemption rate using upper and lower limits. You pay higher redemption amounts if you have more money available than expected. This has the advantage that you pay less interest.
You receive a loan on which you first pay only constant interest. First, you don't pay it accordingly. At the same time, you save money every month with a savings contract (e.g. endowment life insurance or security savings contract). Thanks to the savings contract, you finally managed to accumulate the sum to pay off the loan all at once. The idea behind this concept: you profit from the returns on the capital market - e.g. you get 8% return and have to save less. The disadvantage is that the interest rates remain the same because you don't pay off the total loan amount over the years until the end of the term. When checking, you should exactly compare this type of loan with the annuity loan. If the rate of return is too low, the bullet loan becomes more expensive. A further disadvantage: when selling the property before the expiration of the loan term, the whole amount of the loan continues to exist.
One possibility is also the building loan contract. A combination of a building saving contract and a loan is usually agreed here. In other words, with a building loan agreement you first save about 30-50% of the loan amount and receive interest on it. At the same time, you will have to pay approx. 1-1.5% of the contract sum plus account management fees. When you sign the contract, you determine the interest rate for the loan as well as the term and the amount. At the time of allocation (usually after 40-50% of the sum has been paid in, e.g. after 10 years), you will then receive the loan and pay the agreed interest. The redemption of the loan begins only then.
Should you need money immediately, you can apply for immediate or pre-financing. This means that until the loan has reached maturity, you will receive a bullet loan: you first pay only the interest and the redemption in one fell swoop at the end of the loan term or when the building loan (bauspar) is allocated. Since you also save on building loan during this period, this replaces redemption. However, this is usually expensive and more complicated. Ask the bank to explain you how much interest you will receive on the building loan contract and how much interest you will have to pay for the loan and the costs. This is usually more expensive than a normal building loan. The consumer advice centre recommends choosing simple contracts. The more complicated a model is the more costs it can hide.
Conclusion: Make sure you can afford this
A real estate financing scheme exists in various variations. In any case, we recommend calculating the different models before making a decision. The interest rate should be decisive. Another criterion is the financial feasibility: the monthly burden of interest and redemption plus other costs should not exceed 40% of your net income.
Written by Clara Creitz
Finelles Founder. Coach and Consultant (UBS, Towers Watson).