A mortgage loan is a specially secured variant of a loan and finds particular use in the allocation of high loan amounts. The lending banks achieve a high degree of stability by providing a deposit, the mortgage. In return, borrowers benefit from relatively cheap long-term loans. In particular, the repayment obligations are generally attractive in relation to the sum.
What is a mortgage loan?
The contractual basis for granting a mortgage loan is the existence of a property that is included in the process of lending for the purpose of collateralization. Here, a so-called land charge is entered for a house or apartment. Responsible for this is exclusively the responsible land registry. Basically, such real estate matters are subject to strict state supervision . Also, the acquisition of a property or a property with the intention to specify it later as a mortgage, must be certified by a notary. An alternative approach categorically excludes the legislator. The version of the mortgage loan is extremely popular. In Germany, the vast majority of all loan agreements concluded in the field of real estate acquisition or real estate financing come about in this form.
Lender and approach
In addition to traditional banks, building societies and life insurance companies act as lenders . Regardless, the nature or extent of the property. In addition, a mortgage loan for legal and natural persons is possible. The main reason for including a property in the loan conditions is the relatively straightforward variant of the hedge: In the event of a default of payment, the lender has a legally regulated right to exploit the property. This is sold by the bank and the proceeds are used to settle the existing obligations of the insolvent debtor.
The background for such a procedure is the legal situation, which, in addition to a certain grace period for the borrower in financial distress, declares further comprehensive points binding. These include primarily the incurred and clearly regulated costs. Mortgage loans are subject to notarial certification . The competent notary collects in the course of his certification activity according to the scale of fees set rates . The property serving as collateral must be entered in the land register . In this respect, costs are incurred as well as for the determination of the land charge, ie the properly determined property value or value of the property. In addition to these special fees, the usual costs for general notarial matters arise, such as appointments and advice. With the notarial certification as information, the bank then calculates the amount of the annual percentage rate of interest excluding the account maintenance fee and the one-off closing fee. The level of interest represents a long-term burden for the borrower and should therefore be the focus of the contractual negotiation with the lender. A distinction is made here between a loan with flexible and fixed interest rates .
What requirements exist for the mortgaged property?
In connection with the granting of mortgage loans, certain requirements are regularly imposed on the mortgaged property arising from banking supervisory regulations . This is to ensure that the property in question remains a valuable asset throughout the loan term. Thus, it must be possible to realize the mortgaged property in a timely manner and there must be adequate indemnity insurance. Furthermore, the value of the property to be leased is estimated by an independent expert. To ensure that the security continues to be valuable, there is also regular monitoring by the financing bank . This monitoring has to be done annually for commercial real estate, while for residential real estate, surveillance is considered sufficient every three years.
What are the advantages and disadvantages of the mortgage loan?
One of the advantages of having a mortgage loan is the comparatively low interest rate . Since the loan is collateralized with a real estate, the risk of a loan default for the financing bank is usually much lower than for many other types of loans, for example consumer loans. Therefore, the terms of a mortgage loan are usually much cheaper than unsecured loans. Another advantage is that the borrower can deduct the interest on a mortgage loan for tax purposes, provided that he does not live in the property in question, but leases it to third parties. In this case, the loan interest may be deducted for tax purposes as income-related expenses in connection with rental and lease income . In addition, rental income from a rented apartment ideally should be sufficient to cover the monthly payment obligations for interest and principal.
One disadvantage of mortgage loans is the notary and court costs associated with the registration of land charges. In addition, the borrower bears the rental loss risk in the event of letting to third parties. This results from the fact that the borrower must continue to pay the interest and repayments for his mortgage loan to the bank even if he does not find a tenant for his property or if the tenant is insolvent. In this case, the borrower no longer has ongoing rental income available for the debt service, so he has to finance interest and principal from his other current income. Other disadvantages for many borrowers are the comparatively long maturity as well as the typically high loan volume of mortgage loans and the associated psychological burden. Furthermore, premature termination of mortgage loans usually entails higher transfer fees due to the higher loan amount, which further limits the financial flexibility of the borrower .
Which mortgage loan models are there?
If you are interested in a mortgage loan, you can choose from a variety of different offers, not only by the specific conditions, but also by features such as maturity, interest and. differentiate. The most common type of mortgage loan in Germany are so-called fixed mortgages . The designation is based on the fact that a fixed interest rate is agreed over the entire term of these financings. This applies regardless of the respective market developments and is therefore not adjusted downwards or upwards even with interest rate cuts or interest rate increases . The advantage of a fixed-rate mortgage is first and foremost the fact that the financing costs incurred are known in detail from the beginning and over the entire term of the loan. Moreover, the borrower does not have to expect a rise in the price of his credit when interest rates rise. Conversely, he can not benefit from cost savings when interest rates are falling. The higher level of security and predictability of a fixed-rate mortgage can usually be compensated by the bank through a certain premium. The longer the term of a fixed-rate mortgage, the more expensive it is for the borrower .
In addition, a prepayment penalty will be payable to the bank if the borrower wishes to redeem the fixed-rate mortgage early. The terms of a fixed rate mortgage loan can vary from two years to around 25 years, with contracts with maturities of five to ten years being most frequently completed .
In addition to fixed-rate mortgages , there are also so-called variable mortgages , that is, mortgage loans with a variable interest rate. The interest rate can be adjusted by the bank at any time in line with market developments . This is attractive for the borrower, who assumes that interest rates will fall in the coming years. At the same time, this entails the risk of having to spend considerably more on the repayment of the loan when interest rates are rising than initially calculated. In the case of variable mortgages, termination is usually possible at any time subject to a period of notice of six months .
Other forms of mortgage loans
Until a few years ago, mortgage loans with variable interest rates were still relatively rare in Germany, but in other countries – such as in the USA – they are the norm. In the meantime, however, more and more variable mortgages are being concluded in Germany as well. Another form of mortgage loan is the LBOR mortgage . It is characterized by the fact that the interest rate is based on the development of LBOR. The abbreviation LBOR stands for “London Bank Offered Rate” . This is a reference interest rate used in interbank business, which is redefined daily in London. With a LBOR mortgage, the interest rate is adjusted at regular intervals to the development of LBOR . LBOR mortgages typically have fixed maturities, for example, six months. Since LBOR is a money market interest rate, such mortgage loans are also referred to as money market mortgages or rollover mortgages.