For a new house, some banks do not even require own capital. Sounds wonderful, but has many pitfalls.
Less than three percent – it was cheap than ever to finance a property. The financial crisis, the debt crisis, and ECB President Mario Draghi made it possible. You have the interest rates down to record lows. This arouses dreams. Even among those who can not afford a house there actually because they can bring no savings with the financing. But with only three percent interest, many weak: Why not buy the house all on credit?
This is not common, but possible. “All banks offer this, where the risk is kept within limits that the loan can no longer be served at some point,” says Max Herbst, owner of FMH financial advice that monitors the market for construction loans.
Quality of the property of the bank used as collateral
especially stable income levels are important for such so-called 100-percent financing. Officials have therefore lighter, employees also, especially if they are university graduates and two-earner with long tenure. Also important is the quality of the property, as it serves the bank as security. The house has a good location, the risk is low that it loses its value and the bank makes losses if it has to be sold in an emergency.
Promising materials are currently mainly trendy neighborhood in the prosperous cities and popular university cities with smaller apartments. Property buyer in the countryside far from the big cities, however, are unlikely to get a 100 percent loan. An advantage is also who lives in the property itself and is not dependent on their fullest possible rental.
Granted by the Bank such a loan, it makes conditions. It demands more interest and not too small a stabilizing – at least two percent at the beginning, later – so the remaining debt and the risk drop rapidly. And often they also call for a payment protection insurance that kicks in when the home buyers cannot pay the installments.
Risks cannot be underestimated
The granting of such loans is, therefore, more stringent than, for example, in the United States before the financial crisis of 2008. At that time the local banks had made themselves low-income families very generous high amounts of credit available. As interest rates rose, many homeowners were unable to pay the installments, it piled up the foreclosures. The housing market collapsed and tore banks around the world into crisis.
One problem was the time that the mortgages were variable interest rates. Any rate hike felt the homeowner quickly in your wallet. In Germany, construction loans with high-interest periods of ten to even 30 years will be awarded. During this time, homebuyers are immune to rate hikes. 100 percent financing, therefore, less risky in Germany? Yes, but the dangers are still not to be underestimated. Because if the fixed interest period expires, the loan at prevailing interest rates must be renewed. And currently it can be assumed that interest rates in the next decade will no longer be on the record lows of today, but higher. FMH has the risk expected (see chart).
In the example, the house will cost 500,000 euros and is to be repaid within 30 years. Longer it will not last because the property is to be paid off before retirement. The additional costs for tax, notary, and brokerage of about ten percent by the buyer of his savings. He agreed to a fixed interest rate of 15 years. Of course, the monthly transmitting rate varies greatly with the amount of its own capital, which he can bring to the financing. Without their own savings, so at the 100 percent financing, the monthly rate is 2,250 euros. he needs only 70 percent credit because he has saved the rest of 150,000 euros, its rate decreases to only 1,360 euros.