The young generation on the farm often wants to live differently from their parents and grandparents – this also means new demands for financing. If you want to buy a home and need a bank loan, know that cheap money alone is not enough.
Interest rates are low, but …
Although interest rates have meanwhile risen since their historic low, interest rates as a whole remain quite attractive for long-term real estate financing. The ten-year construction rate was still 1% in January 2022 and 2.8% at the end of May 2022.
But “cheap” money alone, like grants and subsidies, should not lead to the loss of the critical points of long-term funding sight.
Three crucial questions
The decision to buy or build a house is binding for decades. Therefore, careful preparation makes sense. First of all, three questions need to be answered:
- How much money do I get / get from the bank? How much equity is there? What personal contributions can I / can we actually make?
- How much does the property cost realistically? All related costs from surveying to any land transfer fees, notary costs and equipment (kitchen, furniture, garden …) must be taken into account.
- What monthly load is tolerable?
With regard to the first question, it should be noted that non-equity financing is only approved in special cases. Equity, be it in the form of accumulated credits, for example in construction loan contracts or through the value of an existing, unencumbered property, is a prerequisite for obtaining financing.
The share of equity in the total cost should not be less than 10%. The general rule here is that more is better, as the loan-to-value ratio greatly affects borrowing costs. The price of a house depends on many factors. Depending on the location of the property, values are between € 120 per person. m2 and more than € 500 per. m2 (in larger cities with preferred residential areas) possible.
The construction costs are currently difficult to calculate, as many trades are currently offered at current prices, which increases the risk significantly for the client. The desired equipment can also make a building significantly more expensive. (Editor’s note: insiders are talking about € 5,000 more in construction costs per month. Those who want to build kitchens currently need to add € 2,000 more.)
What is the loan-to-value ratio for mortgages? An important term from the lending business is the loan-to-value ratio. This is the percentage of the loan amount taken in relation to the mortgage value of the property.
It is a significant part of the risk in financing and is therefore an important factor for the bank to calculate the loan terms. The lower the loan-to-value ratio, the lower the bank’s risk of loss and the cheaper real estate interest rates it can offer. To calculate the loan-to-value ratio, all loans are added together and divided by the loan-to-value ratio.
The formula for this is: Loan ratio = (loan amount + KfW loan + existing previous fees) / loan ratio.
A practical example: The mortgage value of an object is € 300,000 and you want to take out a loan of € 150,000 for it. You also need a KfW loan of € 50,000 to get the financing started. We also assume there are no preloads. This means that there are no third party loans that are still outstanding on the house.
In the text example, the loan-to-value ratio is: (€ 150,000 + € 50,000 + € 0) / € 300,000 = 0.67 = 67%. The property is thus mortgaged with 67 per cent.
The collateral value of a property is below the market value. This is the value that can currently be achieved in the market. To reduce the financing risk, the bank applies security discounts to the market value. Depending on the property’s location, equipment and marketability, these amount to 10 to 35%.
Additional costs are high
Especially with purchases, the associated costs are a significant factor that matters: NRW charges a 6.5% property transfer fee for the building plot and the house that stands on it. The broker – if it is involved – demands its share of the purchase price. The commission can be negotiated individually. This can be 2 to 6%.
When brokering, it should be noted that according to the current legal situation in consumer agreements for the purchase of single-family houses and condominiums, at least 50% of the commission is borne by the seller. An additional 1 to 1.5% of the business value is held for notaries and officials at the district court, such as rewriting of the land register and registration of land tax.
Renovation costs are often difficult to estimate when buying an older property. In some cases, it can be a good investment to make an inspection with a building expert. This can avoid unpleasant surprises. Ask about the cost in advance; between 500 and 1000 € are usual for an inspection with a subsequent written report.
Loans, interest rates, duration
What else should builders and home buyers consider when it comes to financing? Builders and property buyers usually finance their four walls with an annuity loan. They pay constant installments, which consist of an installment and an interest component.
The higher the repayment, the faster the loan is repaid The banks offer loans with a fixed interest rate of ten years and longer. As a starting point, the longer the fixed interest rate, the higher the interest rate will be. Special installments in the loan agreement are also possible, but cost 0.1 to 0.2% interest surcharge.
The right to special installments allows the borrower to repay a certain part of the loan amount, usually 5 to 10% per annum, in addition to the agreed monthly installments. About money from grandpa or grandma, gift or bonus payments from the employer: With special installments, you can shorten the loan period and save interest.
After ten years, borrowers can also terminate longer-term contracts. You can then repay the loan without early repayment fee Banks are usually willing to provide the loan for up to three months without calculating interest. If you need to use the loan first or most of it later, you should negotiate the commitment interest rate with the bank.
The commitment interest rate should not be higher than the interest rate on the loan. Despite the low interest rates, builders and buyers should obtain comparative offers from two or three banks. With long maturities, two or three tenths of an interest rate quickly sums up to several thousand euros that can be saved or lost. Pay attention to both the interest rate and the associated conditions such as account management costs, assessment fees, etc.
Grants to builders
The framework conditions for grants are set by politicians and therefore change unforeseen. The latest example of this is the halt to KfW subsidies for new construction with certain energy framework conditions in the spring of 2022. To get the best possible advice here, we recommend talking to an energy consultant who will recommend both the most sensible energy-related measures and the current promotional initiatives from KfW (Credit Institute for Reconstruction) and BAFA (Federal Office of Economics and Export Control).
Depending on the subsidy program, the involvement of an energy consultant is mandatory – the costs are then at least partially subsidized. In addition to interest rate cuts, there is other state support for families in particular: It includes e.g. Baukindergeld, which expires during 2022 (www.kfw.de).
In North Rhine-Westphalia, the state provides additional financing in the form of cheap loans. Prerequisites are compliance with certain income limits and receipt of child allowance. Further information can be found on the websites of NRW-Banken (www.nrwbank.de) and the Ministry of Building (www.mhkbg.nrw).
If one partner earns the necessary family income, a time-limited life insurance policy must be taken out for the benefit of the other. Especially in the first ten years, when the load on the property is still very high, this in the event of death can help to keep the family house, as at least part of the loan can then be repaid with the insurance benefit.
It is natural to take out this insurance for both partners, ie also for the person providing the family benefits. The rule of thumb for lifetime insurance, which should be taken out without a savings component, is € 10 per month for every € 100,000 sum insured.
Business administration compact for farmers: Numbers are just as important as working in the fields and with the animals. This five-part series, “Business Basics for Farmers”, is about the numbers. Expert author and consultant Rudolf Schüller, an employee of Westfälisch-Lippische Versicherungs- und Unternehmensberatung GmbH (WVU), explains the individual parts of the financial statements, provides preliminary information and shows important key figures – understandable and with the glasses that your credit counselor puts on to identify possible Identify risks for the bank as early as possible.
These are the topics:
How do I read a balance? + work aid (weekly paper section 8/2022)
What does the income statement + work aid say (weekly magazine episode 9/2022)
The return report: A document with seven seals? (weekly newspaper section 10/2022)
Important key figures I: Liquidity, profitability, asset situation + formulas (weekly newspaper section 11/2022)
Important key figures II: Operational key figures + formulas (Weekly Journal Episode 12/2022)
Cost calculation and practical examples (Ugeskrift 13/2022)
Financing a property properly (Wochenblatt episode 23/2022)
What is the best way to finance machines? (weekly newspaper section 24/2022)
All topics are gathered in the dossier: Business administration for farmers – simply explained