Real estate financing: What you need to know
If you are about to buy a property, there is no getting around the need for financing. To give you an insight into this often complicated business, we have gone to the experts for some advice. Olaf Grumm is head of the financing department at Ziegert EverEstate and has years of experience in advising on real estate financing. He helps us answer your most important questions.
What are the reasons for buying a property?
There are various motives for deciding to buy a property. One of the most common is to use it as a capital investment. Investing in real estate is considered to be one of the most stable investments and can be the solid foundations of your asset-portfolio mix. Another important reason for buying a property is of course to use it yourself. People often weigh up the pros and cons between buying and renting. When buying, the loan interest rate is equal to the rent, while the loan repayment flows into asset accumulation. Your own four walls thus replace the savings book. The big advantage is that you enjoy more freedom in your own home and the loan is paid off after the term. For Olaf, differences between buying as a capital investment and buying a home are of a more arithmetic nature. Although there are no differences in interest rates when taking out a loan, you usually use less equity capital for an investment and keep the repayment as low as possible. This is generally due to the fact that landlords want to keep their interest share as high as possible, as the interest costs can be calculated against the taxable rental income, which results in certain economic advantages.
What do you need to consider when buying property or obtaining financing?
For Olaf Grumm, buying property is a matter of type. There can be great advantages in planning for the future and buying a home - especially in view of price increases and low interest rates. This is especially true for those with clear plans, who have decided where they would like to live. Globetrotters, on the other hand, who perhaps find it difficult to commit, should be advised to make a decision with caution. Because even if you decide to rent out your newly-purchased home, don't forget that you, as the landlord, are responsible for your property and therefore a certain amount of work is involved. Financing is also a matter of type. Ideally, you should feel at home and well advised by the lender, hopefully not too difficult given the variety of both advisors and institutions. In addition, Olaf advises deciding on a provider quickly, in order not to get lost in a jungle of offers.
How long should my loan term be, considering current interest rates?
According to Olaf, the question of the loan term cannot be "definitvely answered". It is often said that, given the presently low base interest rates, you should try to get the longest fixed-rate period possible, so you can continue to benefit from low rates in the distant future. However, the base rate could fall further in the coming years. In addition, offers with a longer duration generally increase interest rates, which makes the investment more expensive for the buyer. In percentage terms, this increase is particularly noticeable if you opt for a term of just over ten years. This is linked to a unilateral special right of termination of the loan agreement, which allows the buyer to withdraw from the loan after ten years. Olaf would therefore advise a term of ten years or as long as possible.
What are the risks involved in deciding on real estate financing?
Regardless of whether you are buying a home for yourself or as an investment, anyone taking out a property loan enters into a long-term commitment. There is always a risk of becoming financially overextended. However, this risk can be minimised with a little prudence. It is advisable, for example, not to commit your entire equity directly into purchasing property, otherwise you may not be able to pay for any necessary repairs or maintenance. Purchase with a partner can also represent a risk. A mortgage has outlasted many a marriage. In summary, it can be said that in many respects the purchase and financing of real estate does not function according to fixed rules. Those who are aware of their preferences and enter the purchasing process with clear ideas should receive good advice.
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