Real estate loan: fixed interest rates for ten, 15 or 40 years?

Real estate loans are currently extremely favorable

T he historic low in interest rates is, in principle, very convenient for real estate financiers. Because thereby the loan interest rates are at present rather low. Who wants, can secure the favorable conditions in the long term. Fixed-interest periods of up to 40 years are possible. "Especially for young families such conditions are ideal," says Max Herbst of FMH Finanzberatung in Frankfurt/Main. With a long fixed interest rate, you have a high degree of planning security and in some cases can calculate with a fixed monthly rate over decades.

In addition, borrowers who choose a fixed-interest period of 20 to 30 years can act more flexibly – because then, for example, parents can freely decide, in the event of an increase in income, whether they would prefer to use the money for the children’s education, to increase the quality of life or to pay off debts, Herbst explains.

Long term has its price

There is much to be said for securing the current mini-interest rates for the long term. However, this also has its price. Because the banks charge an interest surcharge for it. "The longer the fixed interest rate, the higher the premium," says Herbst.

If a borrower’s financial leeway is limited, he should combine a lower repayment with a very long interest rate, advises Annabel Oelmann from the consumer advice center in North Rhine-Westphalia. In her view, there is nothing to be said against long fixed interest rates of around 20 years: "However, it is important that the financing is accompanied by a sufficiently high repayment rate of ideally three percent, but at least two percent."

It also makes sense for the loan agreement to include an option for unscheduled repayment – at around five percent of the total amount per year. The advantage: "With a bonus payment from the employer or, for example, an unneeded saved reserve, the remaining debt on a loan can be repaid more quickly," explains Herbst.

If interest rates fall further at some point, you can still withdraw from the contract despite the long fixed-interest period. The statutory right of termination under Section 489 of the German Civil Code (BGB) enables the borrower to do this. Accordingly, he can terminate an existing construction financing after ten years – with a six-month notice period. In this case, it is up to the borrower to decide whether to cancel the loan in full or only in part. "A penalty fee in the form of an early repayment penalty is not incurred in either case," says Herbst. This means: Long interest rate security with a high degree of flexibility is available from the eleventh year onwards.

These are the dangers of a short term

Financing with shorter fixed interest rates also has an advantage: "As a rule, the interest rate is lower in such cases, so the loan is cheaper," explains Oelmann. But they are not entirely without risk: because usually after the expiration of the contract, the remaining debt is correspondingly high – and that affects the follow-up financing. Because if the general interest level should have risen up to then clearly, this can endanger the financing and in the worst case even a sales of the real estate entail, says Oelmann.

In her opinion, if you can repay the loan in full within the next ten years, you are taking a manageable risk with a shorter fixed-interest period. "Then the lower interest rate can become a decisive argument", says Oelmann. However, anyone with long-term financing needs should by no means choose the low interest rate of the shorter formation as the sole basis for their decision.

Equity ratio determines the interest rate

Apart from the suitable interest connection also the own capital funds ratio must be correct. "Without sufficient equity capital, banks often charge high interest surcharges," explains Jorg Sahr from Stiftung Warentest. Real estate buyers should be able to cover all ancillary costs and additionally at least 10 to 20 percent of the purchase price from their own funds. Oelmann also recommends that borrowers be sure to include incidental costs in their calculations. Because with each real estate purchase they must pay the land transfer tax as well as usually notary and brokers. "Together you quickly come to ten percent of the purchase price here," calculates the consumer advocate. Who determines thus the monthly credit rate, should calculate with pointed pencil. "Who overestimates itself here, runs the risk of not being able to settle the rate after a few years." dpa/pos

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