Criteria for the most suitable financing
Before the purchase agreement can be signed, you need to plan the financing of your property purchase. If you don’t have sufficient equity, a loan can help to plug any gaps in your financing. A mortgage, development loan, or home loan and savings contract can all be used to finance your purchase. There are huge number of providers, which makes the market somewhat confusing at first, although most building societies, mortgage banks, insurers, and savings banks tend to offer a similar range of products. It is often well worth talking to a mortgage broker. They have access to a huge range of products from a large number of providers and can often secure better conditions than your own bank is willing to offer.
Find out what level of financing you need
The level of financing you require will normally be determined on the basis of your income, expenditure, and the amount of equity you have – and, of course, the price of the property you are purchasing. Although the purchase price alone is not the only relevant factor. You also need to consider the costs of any refurbishment or remodeling, the ancillary purchase costs (e.g. brokers commission, fees for architects, surveyors, and the notary, along with the cost of land registry entries and property transfer tax.
The interest rate on any loans will depend on a number of factors, including your individual creditworthiness, as determined by a credit check. This credit check is used to assess your ability to repay any loan. Banks and other providers base their credit checks on a range of different criteria, taking into account the individual circumstances of every single buyer. In addition, providers use different creditworthiness criteria and even where they use the same criteria, they may weight them differently in accordance with their internal policies. Typical criteria include a borrower’s credit history, income (salary, employer, job security), expenditure (rent, loan repayments), assets (savings and other assets), and indebtedness (loans, liabilities, or guarantees).
Compare special conditions
Before you decide on a provider, you should also review any special conditions, such as interest-free periods, special repayment conditions, and the date from which the full loan sum will be available and from when interest will be charged. In contrast to existing buildings, the purchase price of a new-build condominium typically has to be paid in installments. The cost of the land and construction are paid as construction progresses. This means that there can be a significant gap between the loan being approved and the payment of the final installment of the purchase price. In such cases – and depending on the lender – commitment interest might be charged.
Consider state-subsidized development loans
The financing of a property purchase can be made easier with a state-subsidized development loan. The Federal Development Bank (KfW), for example, funds a wide range of programs to promote homeownership. In particular, families are the major beneficiaries of this financial support. Anyone who starts planning their property purchase early enough would be well advised to consider the state-subsidized building saving contracts, such as the Wohn-Riester (pension saving scheme, which includes the value of owner-occupied property in supplementary pension allowances), housing subsidies, or employee savings bonuses.
Checklist: financing a condominium purchase
- Broker’s commission (between 3% and 6%, plus VAT)
- Notary, court, and land registry fees (ca. 2%)
- Ancillary financing costs (e.g. commitment interest, risk premiums, regular borrowing fees)
- Property transfer tax (depending on the federal state – between 3.5% and 6.5%)
- Surveyor’s fees