For many people, owning their own home is the biggest and most important investment in their entire life. Interest rates on loans are now below two percent, making real estate loans more affordable than ever before. And also because classic forms of investment hardly yield any returns, a veritable buying frenzy has broken out on the real estate market in Germany after years of restraint. Many people want to quickly fulfill their dream of owning their own home before interest rates rise again.
But: Especially for young homeowners, the rude awakening not infrequently comes shortly after the house purchase. It does not necessarily stem from the exaggeratedly high purchase price, which is being demanded more and more often, especially in metropolitan areas, but rather from the incorrect calculation of the real estate loan. Because often one forgets that apart from the monthly loan payment also still many other items are to be settled. Above all the additional expenses and expenditures for the maintenance of the own real estate are underestimated thereby by many house buyers. Others, however, calculate far too generously when planning to fulfill their greatest wish.
Of course these often underestimated costs do not speak in principle against the dream of the own real estate – but for an honest calculation, how large and expensive the home of one’s own may become actually.
Guide real estate credit
How much real estate one can actually afford should in any case be solidly planned, secure in the long term and affordable in the long term. For financing that is – at least in theory – secure, take an honest look at your cash and follow this roadmap:
As a basic rule, the equity should be at least 20 percent of the purchase price. Equity includes cash, savings, shares, securities, building society savings contracts or your own property. Inheritance and donations also increase the equity capital, as do personal contributions during the construction of the house. However, you should calculate the latter carefully: They cost a lot of time and do not replace material costs.
The next step is to make a detailed list of all your income and expenses. Income includes, for example, your net salary (preferably without bonus payments such as Christmas and vacation pay, as these could also be cancelled) and government benefits such as child or parental allowance. Expenses include food, car, electricity, clothing, insurance, loans and maintenance payments. When planning expenses, also include a realistic budget for ventures and travel, as well as a buffer for unplanned costs and repairs.
Determine the financial feasibility
To the difference between income and expenses, add your current rent and subtract the monthly operating costs for your future home: electricity, gas, water, waste disposal. This results in the amount that is available to you each month for interest and repayment of the owner-occupied home. Important: Also remember to plan for the maintenance costs of your dream home. On average, one calculates between 0.8 and 1.0 % of the purchase price as annual maintenance reserves.
Do not forget purchase and ancillary costs!
Also consider the costs that add up to the purchase price of your property. This includes land transfer tax, broker commission and notary fees. Depending on the federal state, you have to calculate nine to 15 percent of the purchase price for this purpose.
Secure state allowances
Check whether you are eligible for government assistance. Because the state supports families with attractive Wohn-Riester allowances and tax benefits. Up to 175 euros per year, plus a maximum of 300 euros per child or 185 euros for children born before 2008.
Making the right use of low interest rates
The sum still missing for the purchase finances a mortgage loan. In times of historically low interest rates, fixed interest rates over 15 years make sense. Also take advantage of the favorable conditions for a higher repayment of two or more percent. How to reduce the risk of rising loan installments after the interest rate guarantee expires.
How much house can I afford – a simple calculation and formula
You can easily calculate the range within which your real estate loan should be calculated using a formula. This consists of the following four elements:
- What is the maximum amount of my monthly installment for construction financing?? This rate is calculated from the difference between all income and expenses, including the annual maintenance reserve and a buffer for emergency purchases in everyday life.
- What is the approximate cost of financing?? This refers to the annual borrowing rate, also known as the effective annual interest rate. Currently, for example, loans for 10-year fixed interest rates are given at 1.0%.
- How high should the annual repayment for my real estate loan be?? The repayment determines the term of a construction loan: The higher the repayment, the shorter the term.
- How much free equity capital is available for my real estate loan??
Concrete calculation example
The above formula and its four elements can thus result in the following calculation example for a real estate loan:
- Desired monthly rate = 900 euros
- Assumption of debit interest for 10 years = 1%
- Desired annual repayment = 3% (so the total term is about 20 years)
- Freely available equity = 50.000 EUR
(900 EUR x 12 months) / 4 (sum of interest and repayment) x 100 = 270.000 Euro
With a monthly installment of 900 euros and the above assumptions, the borrower could afford a property worth 320.000 Euro (270.000 Euro + 50.000 Euro equity capital).