Part 5: This is how follow-up financing works

Part 5: This is how follow-up financing works

Readers question: I have to reschedule soon. Ten years ago I financed part of my loan with two Riester home loan savings contracts. Now I would like to take the credit to pay off the bank loan. Does it make sense to withdraw the loan without damaging the subsidy or can this later lead to incalculable payments during my retirement? The amount of bureaucracy involved in extracting items that are not harmful to funding is also considerable.

Mathias Breitkopf: In fact, there is a certain amount of bureaucratic effort involved with the resident ruler. And basically two options are available for the downstream taxation, namely one-time or annual taxation. With one-off taxation, only 70 percent of the housing subsidy account has to be taxed. Since I do not know your Riester contract, I cannot give you a general answer. In order to find the best option here, I recommend that you speak to the provider of the Riester contract and obtain information from the Central Allowance Agency for Retirement Assets (ZfA). You should also seek advice from your tax advisor about the effects of taxation in your case. 

Read more: 

Part 1: So much equity is needed

Part 2: What additional costs do you have to expect?

Part 3: Piggy Bank Or Loan – Which Is Better?

Part 5: This is how follow-up financing works

Part 6: Speculative Tax – Pitfalls in Real Estate Selling

Part 7: Baukindergeld and Co. – Using subsidies sensibly

Mathias Breitkopf is Head of Private Customer Business at Interhyp and responsible for several branches. The proven financing expert answers the questions of readers. (Photo: Interhyp / Annette Hornischer)

Building interest rates have moved slightly from their all-time low. They are still at a historically low level. But the question is in the room: Will building interest increase in the long term?

In the meantime, negative interest rates for real estate loans have already been mentioned, but these are now somewhat less likely. Nevertheless, the majority of experts still expect a favorable offer of construction finance.

At the beginning of November, the conditions for construction financing just exceeded the all-time low marked in autumn and are slightly higher by about 0.1 percentage points, according to the broker for construction financing Interyhp.

Loan rates remain low

The yield on ten-year government bonds, which plays an important role in the development of building money, has recently increased somewhat. The interest on ten-year loans at the beginning of November was in many cases between 0.5 and 1 percent despite the slight increase. 

Home loan: The five most common mistakes in real estate financing

 Expansive policy of the central banks

The reason for the generally relatively favorable level is the global economic and political uncertainties combined with the low interest rate policy of the central banks. "As the Fed’s renewed interest rate cut has shown, an expansive monetary policy is being pursued. At the European Central Bank, under the new leadership of Christine Lagarde, a continuation of the low interest rate policy is also to be expected", explains Mirjam Mohr, board member of Interhyp AG. As long as the framework data does not change, borrowers do not need to fear a turnaround in interest rates for the time being, according to Mohr.

ECB interest rate: In 2014, the European Central Bank (ECB) lowered the deposit interest rate, i.e. the fee for bank deposits at the ECB, to below zero for the first time. Banks currently have to pay a penalty interest of 0.5 percent on their deposits.

compare offers

Despite the low interest rate environment, property buyers should not forego a comparison of the conditions for mortgage lending. The loan should meet individual needs. Important points here are, for example, the fixed interest rate, the initial repayment and the options for special argumentative essay In addition, interest-free periods when building or buying from a property developer can be important.

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 In the current interest rate environment, property owners who need a follow-up loan can save. A few years ago when the first loan was taken out, the interest rate level was significantly higher.

Sources used: Own research Interhyp

The building interest is low, there is no money in the savings accounts. Should the savings be put into the financing of a property or should a larger loan be taken out? 

In the third part of our series on construction financing, the financing expert Mathias Breitkopf answers questions about financing a property against the background of low interest rates.

Financing is that part of the purchase price for which a bank loan is taken out. The rest of the purchase price as well as the additional purchase costs should be paid for from equity.

Reader’s question: My husband and I – both around 60 – are considering selling our apartment and moving into a barrier-free house. Our dream property should cost 350,000 euros, the apartment is valued at around 200,000. We could cover the difference from overnight money accounts and a small home loan and savings contract. Does it make sense to use up the cash reserves or should one finance part of it?

Mathias Breitkopf: From a very rational point of view, looking purely at interest rates, I would say: Yes, it is worth using the savings to make purchases. Because on the overnight money account it brings at most mini interest.

But there is another side that is much more exciting for me personally. Ask yourself how you want to spend your old age. Would you like to travel, for example, and still have enough buffer for expenses? Then it can be worthwhile to use a mix of liquid funds and loans for the property and still keep enough cash in savings accounts for a pleasant retirement. Otherwise you would have to take out an expensive installment loan in an emergency.

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Readers question: should you borrow a little more money given the current low interest rates? What would you advise to make the follow-up financing as convenient as possible after the 10-year term?

Mathias Breitkopf: When you ask the question, should you use your equity for financing or, better still, take out more credit because you don’t want to put all the money into the property. Balance well and keep a buffer of cash. Ask yourself: What investments do we have to make in the next few years? The children’s education? Bigger purchases? The life situation now and in the future is crucial.

With this in mind, the loan amount and the resulting installments should not be too high for you. The following applies: You should not only be able to afford the installments based on today’s interest rate, but also in the event of future interest rate increases – for example, if the interest rate increases by 2 to 3 percentage points. Don’t take on too much credit. Only as much as you need – although you should not forget the ancillary costs, especially for building projects.

Good mortgage advice will be able to determine the correct amount. My tip: To make the follow-up financing as pleasant as possible, you can make provisions now. For example, you can choose a longer fixed interest period, because 15-year and 20-year fixed interest rates are also relatively cheap at the moment. And what many do not know: ten years after a loan has been paid in full, you can still use the special right of termination to terminate the loan and, for example, repay or reschedule it. This is in the civil code (§ 489). You can already opt for a full repayment loan for 20 years, for example, and in the end you would be guaranteed debt-free. Have the scenarios calculated for you, ideally by a mortgage expert.

Reader survey: As a former applicant for personal bankruptcy, can I apply for construction finance to buy a house because I am now making a good income?

Mathias Breitkopf: If the insolvency proceedings have been dealt with and the Schufa cleared, that shouldn’t be a problem. For this purpose, however, all notes in the Schufa should be deleted, which is usually only the case a few years after the remaining debt has been discharged. In order to prepare yourself as well as possible, I recommend that you obtain your own qualifications and seek personal advice. 

Read more:

Part 1: So much equity is needed

Part 2: What additional costs do you have to expect?

Part 4: Save thousands of euros by rescheduling

Part 5: This is how follow-up financing works

Part 6: Speculative Tax – Pitfalls in Real Estate Selling

Part 7: Baukindergeld and Co. – Using subsidies sensibly

Mathias Breitkopf is Head of Private Customer Business at Interhyp and responsible for several branches. The proven financing expert answers the questions of readers. (Photo: Interhyp / Annette Hornischer)

Due to the persistently low interest rates, home loans are still cheap. The cheap construction money, however, has a big horse: the loan can become an endless debt trap.


Annuity loanSpecial repaymentHigh repayment rateFollow-up financingPayment penalty

Low building interest rates make the dream of having their own four walls a reality for many. What borrowers usually underestimate, however: The lower the interest rate, the longer it takes to pay off the loan.

Annuity Loans: Constant Installments

The Munich online broker Interhyp uses a model calculation to calculate how long it can take before a construction loan is fully repaid: In an interest rate environment of six percent, borrowers need an average of around 30 years to repay a loan in full with a standard repayment of one percent. With an interest rate of around four percent and the same repayment rate, it takes around ten years longer to become debt-free.

The reason for the longer term in the low interest rate is the constant rate of an annuity loan, which consists of interest and repayment. At low interest rates, the interest component is reduced more slowly – and this means that the repayment component also increases less quickly than at higher interest rates.

Annuity loan: With this type of loan, the monthly installments (consisting of the interest and the repayment portion) remain constant over the term of the loan. This means that the contractually agreed interest rate does not change.

Special repayment: debt relief turbo

One way of paying off the building loan earlier is to make unscheduled special repayments – for example, over five or even ten percent of the loan amount per year. The advantage of special repayments is their flexibility. The option can, but does not have to be drawn. It is useful if, for example, income has developed well over the years, if special payments are pending from the boss or an inheritance is expected.

The following calculation example shows how the additional repayment can be worthwhile, even if it is only used once: If a building owner pays back the sum of 10,000 euros in one fell swoop after five years, the total term of a 200,000 euros loan is already reduced by 3, 5 years. Also saved: 2,800 euros in interest costs. If the builder can reduce his loan debt by this amount even earlier, namely after two years, he will be debt free four years faster. And saves a whopping 4,800 euros.

A good two thirds of all borrowers actually have the debt relief turbo in their contract, according to Interhyp. But only very few take advantage of their special repayment opportunities and prefer to put the remaining money on the high edge. This is not a good idea in times of meager credit interest. There is currently no better way to invest the savings than to lower a large loan. Paying off a building loan quickly is currently better than any savings contract.

High repayment rate: save interest

Anyone who believes that they cannot raise special repayments should at least afford the highest possible repayment rate. When it comes to financing, it is not advisable to just look at a cheap monthly rate, even when the interest rate is low. The following applies: the higher the monthly payment amount, the higher the repayment installment. This is all the more true in times of low interest rates.

Tip: Anyone who can afford it should choose a higher repayment rate. The construction loan can only be paid off in a manageable period of around 25 years with at least two percent. In case of doubt, an adjustment of the repayment rate – depending on the situation – can be contractually agreed.

An example: if you take out a loan for 150,000 euros at an interest rate of 4.35 percent with the classic one percent repayment, it takes almost 39 years to get rid of all of your debts. With a repayment of 2.0 percent, the builder or property buyer is ideally released from his obligation twelve years earlier and has saved almost 57,000 euros in interest.

Follow-up financing: new interest situation possible

Another aspect that is easily forgotten or pushed far into the future when signing a building contract is follow-up financing. If a loan agreement expires and the loan is not yet fully paid off, follow-up financing is required. The problem: Anyone who redeems too low when interest rates are low could then experience a nasty surprise. For one thing, a large part of the loan still has to be paid off. On the other hand, the interest rate situation may then have turned.

If, for example, interest rates have climbed to an average level of 6.5 percent years later, the monthly installment for the still high residual debt will hardly be payable anymore.

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