Loans and subsidies: this is what you need to consider when buying a house

This is what you should know before you buy your first own property

Real estate prices continue to rise – despite the low-interest environment. Straight one in the Corona time grows with many the desire for a home of one’s own.

But in addition to the different types of financing, you should also pay attention to the additional costs, as well as the amount of your own capital.

Business Insider spoke to Detlef Hartmann, regional manager of Landesbausparkassen (LBS) Nord and Dennis Rose, financial advisor and real estate specialist at fragfina.de talked about the risks and chances of a real estate purchase.

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In the current low-interest phase the desire of the own real estate seems more realistic than otherwise. Credits with an interest rate of 0.8 per cent facilitate the entrance additionally for the broad masses. But real estate financing is not without risks, especially because real estate prices in Germany continue to rise despite the Corona crisis.

The Federal Statistical Office found that apartments and detached and semi-detached houses were on average 8 percent more expensive in the fourth quarter of 2020 than a year earlier. Particularly with high real estate prices is therefore on some things to be paid attention to. Business Insider asked two experts about this.

Real estate as popular age precaution

In Germany, only about 45 percent of households own the property they live in, but most see the property as a good investment. According to a representative survey of the pension insurance of the past year, 79 percent of respondents named their own property as the ideal form of retirement security. That made it the most popular form of old-age provision for Germans – even before the pension.

Detlef Hartmann, regional manager of the Landesbausparkassen (LBS) Nord, has a good reason for this: "Everyone knows that you should make provisions for your old age, but many people find it difficult to restrict themselves as a young person in order to have a higher pension later on. But if I invest in real estate instead and thus start to build up my own capital, that’s more interesting." Not without reason is the favorite slogan of Hartmann therefore: "Residential property is the only age precaution, of which I have today already something."

Dennis Rose, financial advisor and real estate specialist of fragfina.de, however, sees real estate as a form of retirement provision more critically: "You have to make sure that you don’t overstretch yourself with the amount of the loan. In the age one can live in the own real estate rent-free, but not necessarily free of charge."Additional costs for maintenance and ancillary living costs would have to be factored in.

How much can you afford?

If nowadays in particular a young person would like to buy a real estate, he must fall back frequently to credits. If you want to find out how expensive a property can be and how much equity you need for the bank to grant a loan, you can use the construction financing calculator of the LBS, savings banks or other service providers. Individual construction financing consultations are also available from the consumer centers. In principle one should count according to LBS expert Hartmann on an interest of 1 to 1.5 per cent and strive for a repayment of two to three per cent. After forty years at the latest the real estate should be paid off and that best before the pension. If you’re thinking of paying off a home loan instead of rent, Hartmann says you need to consider maintenance reserves, insurance and housing subsidies. The costs are to be settled according to Hartmann thus more highly than only for the credit are necessary.

With these additional costs you must count

Who buys a real estate, may not forget the additional costs apart from the acquisition costs. This includes the land transfer tax, which is between 5 and 6.5 percent depending on the federal state; only in Bavaria and Saxony is the land transfer tax slightly lower at 3.5 percent. In addition, the costs for the notary and the entry in the land register must be calculated (two percent), a possible brokerage fee of two to three percent may also be incurred. The consumer advice centers recommend a total of ten percent of the property price for ancillary costs, and the LBS even recommends up to 12 percent. Possible renovation works are not considered thereby yet.

How much equity is necessary?

"The ancillary costs of about 10 percent should at least be available as equity, then the property can be fully financed with the appropriate credit rating," explains Hartmann. In the today’s time young people could not afford otherwise no more real estate, if they cannot fall back on an inheritance or the financial support of parents. Rose sees this critically: "If the will for the house purchase is so strong, one can strive for the full financing, then the interest for the credit is however also with over two per cent. Then the credit rating should be good and the income high."He advises equity capital of at least 15 percent of the purchase price plus ancillary costs. "This means the loan-to-value ratio, i.e. the risk for the bank, is lower and the borrower gets a lower interest rate," Rose explains.

And how can the financing look like through a loan?

If you would like to finance a real estate, you have two ways to the selection. In the case of the usual annuity loan, you pay interest and repayment monthly. In today’s low-interest phase, a long-term fixed interest rate makes sense, because it offers planning security for the coming decades. Those who currently take out a loan with a fixed interest rate for only 10 to 15 years run the risk, according to Hartmann, of having to accept higher interest rates thereafter. "Banks offer interest rate security for up to 30 years, but then the interest rate also becomes more expensive and is over 2 percent, perhaps even over 3 percent," explains Hartmann. In principle, the lower the interest rate, the higher the repayment can be and the faster the loan is paid off.

Being debt-free as quickly as possible sounds good at first, but it doesn’t always make sense for investors. Therefore advises real estate expert Rose here to the differentiation between the real estate as own home or as capital investment. "If you live in it yourself, you should pay back as quickly as possible. If one wants to let the real estate, one should repay as little as possible and slowly the credit, because the fiscal advantage is higher." .

The other way is through a building savings contract, which about 40 percent of Germans have. "Here, only the interest is paid and the repayment amount is paid into a building savings contract. This has the advantage that the interest rate of 1 to 2 percent is not only lower, but also fixed for the time after 10 to 15 years," explains Hartmann, whose core business is building savings contracts that offer long-term interest rate security. In the case of a building society, at least 40 percent must be paid in so that one can get a loan for the remaining 60 percent – this often takes a few years.

Because a building savings contract often offers interest rate security, but can also entail high repayment installments, Rose advises building savings only in certain cases: "A building savings contract often makes sense if you take it out at the start of financing, because you can build it into the financing in a suitable way."On the other hand, it often makes no sense to take out an annuity because the acquisition costs are too high and the interest rates are too low these days. "Often, not all banks accept all building savings contracts, so you may later be limited in the choice of lenders," explains Rose.

For Hartmann, the building savings contract is a very German product because it guarantees security. "In other countries, such as the USA, there is more speculation. But this can then create bubbles like Lehmann’s in 2008, when the banking crisis broke out," says Hartmann. If you don’t need the building society savings after all, because the interest rates may not have risen, you can withdraw the balance again, but this often means you lose some money due to the closing fees. Who would like itself to secure thus a fixed interest as long as possible, should not reach according to rose directly to the building saver, but also with the own bank times to inquire, because "a fixed interest period of approximately 30 years is often not so much more expensive than with 10 or 15 years."

If a bank entices with low-interest contracts of less than one percent, there are also some things to consider, according to Rose: "You have to expect that it has certain disadvantages compared to a higher interest rate, for example, a very short fixed interest rate, little repayment or an online-only service, if it is an online bank."

But you can still trust these offers thanks to government laws and guidelines, if it is a bank based in Germany.

These subsidies and facilities are available

Also the state helps in some cases with the real estate desire. In addition to the Wohn-Riester, there is nationwide still the housing subsidy with an income limit of 35.000 euros a year, double that for a married couple. Before finalizing financing and signing a loan, LBS regional manager Hartmann says it’s best to find out about local subsidies in particular. Also regional promotion banks of the K grant often favorable credits, if certain conditions, for instance the energy efficiency of the real estate, are fulfilled.

Decisions, decisions, decisions

Apartment or house? New construction or existing building? City or country? If you buy a property, you have to make many decisions – this often deters many in addition to the high investment costs. According to Hartmann, however, avoiding the issue is not a solution either; it would be better to take it step by step.

"You should think about it early and if necessary start with a small apartment. Then, as prices rise, capital develops and later you may be able to afford something bigger," Hartmann says.

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