Tips for home financing


Many people are driven by the desire to own their own home. You want a house as a retreat for the family, an oasis of well-being and an investment for the future. However, building or buying a property does not always turn out to be easy. House financing, in particular, presents a challenge to the future owners. To master this, these tips will help you.

1. Equity as the basis for financing a house

When you finance a house, your equity plays an important role. Without sufficient own means a respectable financing of the desire real estate is not realizable. On average, as a homebuyer or builder, you should be able to pay 20 to 30 percent of the cost out of pocket. The basic amount is required, for example, by many credit institutions when granting a real estate loan.

Although there are financial service providers who will offer you a loan that covers the full purchase price. With these, however, you have to reckon with comparatively higher interest rates. The lack of equity also affects the repayment rate. This turns out partly twice as high as with a house financing with addition of own funds.

For this reason, it makes sense to take a close look at your own assets before applying for a loan. Bring any discretionary funds – finances you don't need as a security reserve – into financing the property of your dreams. You can increase the equity by

  • Tap into savings,
  • Cancel endowment life insurance policies,
  • Cash out building savings contracts,
  • Take out a loan with relatives or
  • Make your own contributions to the construction.

2. A solid calculation of the house financing as preparation

So that you can finance your dream property without getting into financial difficulties, a solid financial calculation is the first priority. If you take out a real estate loan, you should find out in advance what loan amount is feasible for your economic means. Be critical rather than generous in this respect.

First of all, you can deduct living expenses from your income. The amount that remains represents the financing potential. Proceed as follows when calculating the maximum loan amount:

Multiply the monthly financing potential by the number of months as well as the value 100 divided by the sum of interest rate and repayment rate. To make it less complicated, you can see the formula here in short form:

Financing potential per month × twelve months × 100 / interest rate + repayment rate.

To help you understand the calculation, here is an example. In this we assume that you as a borrower have a monthly financing potential of 1.000 euro is available. We calculate with an annual interest rate of three percent and an initial repayment rate of two percent. If you enter these values into the formula, the result is a maximum loan amount of 200.040 euro.

TIP: the monthly financing potential should never exceed 40 percent of your net income.

3. The inclusion of ancillary costs as an important factor

If you want to finance a property, not only the basic house costs will come to you. You also have to reckon with additional costs. You should not underestimate these when building or buying a house. They can account for up to 15 percent of the purchase price. This drives up the total cost of ownership.

In the context of a loan application, this fact means that your equity ratio is reduced. This in turn can cause the interest rate offered by the lender to skyrocket. To avoid this, you would have to increase the equity capital. Alternatively, set your sights on a less expensive property.

Incidental costs directly affect what the total cost of your dream home may be. These include:

  • The real estate transfer tax,
  • Fees for the notary,
  • Costs for the registration in the land register,
  • Incidental financing costs,
  • A possible broker's fee,
  • Costs for renovation as well as
  • Relocation costs.

4. Retain cash as collateral

Although a house financing causes high costs, you may not invest your entire capital into the desire real estate.

The desire of home ownership can lead to bad financial decisions. To meet it, some people invest their entire capital. However, calculations that are too tight and attack reserves pose a risk. From them, in the worst case, can result in financial distress. You can avoid this if you keep a few important points in mind when calculating your income and expenses.

Don't just include living expenses in the calculation. Also plan with the ancillary costs already mentioned as well as a reserve fund. You can use this to carry out maintenance work on older buildings, for example.

TIP: you need a cash reserve of two or three months' salary. You use this to cover unforeseen expenses, for example, due to sudden damage to the building.

5. The choice of fixed-interest period and repayment rate as fixed costs

If you decide for the house financing over a credit, you could profit for a long time from low building financing interest rates. Although these are now slightly on the rise again, they are still at a low level. This makes longer fixed-interest periods of 15 or more years affordable for builders and real estate buyers.

If you choose the longest possible period, you can secure favorable construction interest rates during this period. This leads to more planning security.

In addition to the fixed-interest period, the repayment rate also plays a significant role in low-cost home financing. This should be above the current one percent. Low interest rates mean that the repayment percentage increases more slowly each month and repayment drags out. You can prevent this by not allowing free capital to flow into living expenses.

It makes more sense to increase the repayment rate to two or two percent. As a result, the period for repaying the loan amount is shortened and you can save on interest costs.

Another sensible option is a loan offer with an unscheduled repayment right. These can also shorten the repayment of the loan and help to save money. Who, for example, unscheduled several months 1.Repaying EUR 000 to the lender shortens the total term of the loan by years in some cases. This effect is all the greater the earlier you start with the unscheduled repayments.

Customer-friendly lenders allow you to make annual unscheduled repayments of a fixed amount free of charge. These can amount to up to five percent of the actual loan amount.

6. The consideration of commitment interest as an important planning element

With commitment interest you count, if you conclude a loan agreement, the agreed upon sum after some time however not completely called up. The case occurs, for example, when building a house. As a builder, you coordinate the financing depending on the respective construction phase. Rarely you will immediately claim the entire loan amount.

Since the finanzdienstleister holds these nevertheless, it demands the bereitstellungszinsen. They amount to an average of 0.25 percent per month. This results in an annual interest rate of three percent. With the lenders the time differs, starting from which the commitment interest becomes due. This can be followed by:

Even before signing the loan agreement, you should therefore pay attention to whether and how much interest will be charged. A long provision-free period is advantageous. However, only very few providers grant this free of charge.

7. The offer comparison as an important adjusting screw with the house financing

If you want to save money on home financing, you should not agree to the first best construction financing. It makes more sense to compare several offers from different lenders with each other. For example, depending on the financial service provider, the amount of the interest rate can vary greatly. Just a few tenths of a percentage point can contribute to a significant reduction in the total cost of the loan.

To get an initial general overview of financial institutions, look at construction financing comparisons. You can find them conveniently online. You can individualize the search by adding your personal data to the scale.

A particularly important factor here is your creditworthiness. Your creditworthiness determines whether financial service providers will consider entering into a loan agreement with you. When checking creditworthiness, they turn to a credit agency, for example schufa. Your schufa score indicates the extent to which you are creditworthy. If there is a negative entry or a low score, the risk of a loan rejection increases.

When it comes to home financing, however, it's not just your data that matters. Financial institutions also want to see all the important documents relating to the property. If you provide all the relevant information, you will receive an offer tailored to your needs.

8. Applying for government funding as an additional mainstay

Future owners of a property can count on government subsidies in addition to equity and credit. The development banks of the federal states or the kfw – kreditanstalt fur wiederaufbau – provide you with low-interest loan offers.

To qualify for state grants, some require you to meet certain income limits. However, these do not apply to a kfw subsidy, which offers favorable conditions and repayment subsidies primarily for energy-efficient construction projects and renovations.

9. Taking out cheap insurance as collateral

Before buying or building a house, not only questions about house financing should be clarified. Insurance also plays an important role.

In addition to the actual home financing, taking out a good insurance policy before buying or building a house is a fundamental factor. However, it does not always make sense to take out all the necessary policies through one provider. These policies include, for example:

  • Construction insurance,
  • Homeowner's insurance,
  • Homeowners insurance or
  • Fire shell insurance.

If you want to save costs, you should compare different insurance offers with each other. Comparison calculators on the internet can help. With just a few clicks you will find a favorable insurance offer. Compared to buying the first-best insurance policy, you can save hundreds of dollars a year.

TIP: use insurance to secure the loan on your property, it doesn't have to be term life insurance. Alternatively, you can take out a residual debt insurance policy. With this option, you benefit from the adjustment of the respective insurance amount to the current remaining debt. Consequently, this policy turns out to be less expensive than a conventional term life insurance policy.

10. Planning for unforeseen factors as a final point

If the most important questions about the house financing are clarified, however, this is not yet completely finished. As with any project, unforeseen events can occur when building or buying a home. It may be useful to imagine some scenarios and already think about a solution. For example, what happens to the property in the event of a divorce? Which insurance takes effect in the event of a natural disaster?? Or what to consider if you want to rent out the house at a later date?