This is how real estate loans differ
If a loan is taken out to buy an existing property or build a house, it is a construction loan. The types of financing are differentiated on the basis of the repayment modalities, the purpose and the interest.
Below you will find an overview of the most important distinguishing features of the types of financing. A distinction is made between classic real estate loans, promotional loans and special forms.
The classic among types of financing
A large proportion of builders and property buyers choose one of the classic forms of loan for home finance. In addition to the annuity loan, this also includes variable loans and the forward loan for follow-up financing.
Annuity loans: constant installments over the entire term
The annuity loan is one of the most common types of financing. The loan amount is repaid in constant installments (annuities) during the borrowing period, which is usually 5 or 10 years.
The monthly, quarterly or half-yearly installment consists of an interest and a redemption component. As the remaining debt is continuously reduced during the term of the loan, the interest portion of the installment becomes smaller and the repayment portion increases.
The advantage of this real estate loan is that borrowers can calculate their monthly charges precisely. If the borrowing rate is fixed for more than 10 years, there is also a statutory special right of termination after 10 years.
Variable loan: interest rate is continuously adjusted
A variable loan is a suitable alternative for borrowers who do not want to commit themselves to a specific interest rate. With this form of financing, the interest is not fixed over a long period, but is adjusted every 3 months to the current market interest rate. The basis for the interest rate adjustment is the Good Finance, a reference interest rate at which banks borrow money from one another.
With variable real estate loans, the borrower bears the risk of an interest rate increase, but can benefit from a high degree of flexibility. Because variable loans can be terminated at any time at short notice and fully repaid without having to pay a prepayment penalty. There is also the option of converting the variable loan into an annuity loan with fixed interest rates and making special repayments at any time.
Forward Loans: Secure Interest Rates Up To Five Years In Advance
A forward loan is a form of follow-up financing where borrowers can secure the current interest rate up to 5 years in advance. Such a loan is only paid out after the remaining term of the existing loan.
The interest on a forward loan is usually somewhat higher. However, if the interest rate level is expected to rise and the borrowing rate of the existing loan has not yet ended, borrowers can hedge against rising interest rates. If interest rates actually rise, borrowers will then receive a lower interest rate for their follow-up financing than at the actual debt rescheduling date.
Special promotion loans
Borrowers sometimes receive real estate loans with special grants at lower interest rates. The types of financing in which borrowers can benefit from state subsidies include Lite Bank loans, residential area contracts and building society contracts.
Lite Bank loans: low-interest loans and repayments
The state supports construction, purchase and renovation projects with low-interest loans, repayments and investment grants through the federal development bank Lite Bank. Which Lite Bank funding is eligible depends on whether a property is being built, bought or renovated.
As the maximum loan amount for the Lite Bank support programs is limited, at least part of the required amount must generally be financed through one of the classic forms of loan. However, some of the individual Lite Bank loans can be combined with one another. Lite Bank’s offers are particularly worthwhile when it comes to energy-efficient renovation or construction.
Residential loan: benefit from government allowances
The construction or purchase of owner-occupied residential property is subsidized by the state through the so-called residential. Basically, a residential Good Finance loan is a variant of the annuity loan that includes a Good Finance grant. However, a prerequisite for Good Finance funding is that the financing option in question is certified by the state, has an ongoing repayment of at least 1% and that at least 4% of the gross income of the borrower is spent on the repayment.
With a residential Good Finance loan, borrowers benefit from allowances and tax benefits just like with a classic Good Finance contract. The allowances are paid as a special repayment in the residential Good Finance contract.
With a home loan at low interest rates
If a home savings contract is concluded, there is the option of choosing a loan for the home finance. For this purpose, a specific saving amount is contractually agreed with a building society and the minimum savings required for allocation are saved through regular payments. If this minimum amount is reached, the bank releases the payment and the part missing up to the agreed saving amount can be used as a home loan.
The advantage for borrowers is that the real estate loan is granted regardless of the current market interest rate at the contractually agreed interest rate. A special variant is the home savings loan, in which the bank grants the loan, although the required maturity of the home savings contract has not yet been achieved.
Special forms – modifications of the classic types of financing
In addition to the classic types of financing, various special forms have been established that at least partially contain elements of the common forms of loan. These include the cap loan, the constant loan, the consumer loan and the foreign currency loan.
Cap loan: Variable loan with agreed interest rate cap
A cap loan is basically a variable loan. This means that the interest rate is variable and is adjusted to the general interest level at regular intervals. As with variable loans, the basis for the interest rate adjustment is Good Finance, the interest rate at which banks borrow money from one another. However, an upper interest rate limit is also agreed for this type of loan. This allows borrowers to benefit from falling interest rates, but the risk of an interest rate hike is limited. If the general interest rate level increases, the interest rate on the cap loan only increases up to the contractually agreed upper limit, the so-called cap.
In the case of cap loans, high special repayments are also possible at any time, but at significantly more expensive terms than with variable loans without an interest cap.
Constant loan: constant monthly installments until full repayment
The constant loan is a special form of building society contract, in combination with full financing. The loan is paid out immediately and repayment begins, without having previously saved a certain minimum balance. In contrast to an immediate home loan, a fixed monthly repayment rate is guaranteed for a constant loan over the entire term. In addition, the interest is fixed over the entire term. At the same time as the repayment, the payment into the building society contract begins. With the allotment of the building society contract, the loan is partially repaid. The remaining debt is continued as a home loan with constant installments.
Given the constant interest and repayment rates, the constant loan offers a high degree of planning security. However, there are also certain risks such as a lack of transparency and comparability with a classic annuity loan. For this reason, the advantages and disadvantages should be carefully weighed before the conclusion.
Consumer credit: finance purchases related to home ownership
A consumer loan can be used to finance investments and purchases related to home ownership. Basically, this loan variant is an installment loan with terms of 12 to 84 months. In addition, there is usually the possibility of special repayments for consumer loans. The financing framework, at 5,000 to 50,000 USD, is significantly lower than that of traditional types of financing. Therefore, this form of loan is aimed primarily at property owners who, for example, are planning a renovation or modernization or want to finance a new kitchen.
The most important real estate loans at a glance:
- The most common type of financing is the annuity loan. In view of the constant monthly rate throughout the borrowing rate, it offers borrowers a high degree of planning security.
- Variable loans are more flexible and offer the opportunity to benefit from interest rate cuts. However, borrowers bear the risk of interest rate increases. One way to reduce interest rate risk is by combining annuity and variable loans.
- Alternatively, a cap loan with an upper interest rate limit can be agreed, but this is usually more expensive than a variable loan.
- For those who want to secure the currently favorable interest rate level for follow-up financing, the forward loan is a suitable alternative.
- With promotional loans, depending on the project, borrowers can benefit from government subsidies in the form of low-interest loans or grants.