Fearful purchases of residential property are on the rise – whether for oneself or one’s own children. The former tenants take great financial risks and get into debt in order to get a piece of the pie. This trend can be seen in the increased volume of real estate loans. The increase amounts to almost five percent and is thus the strongest in two decades. However, not only the number of loans is increasing, but also the amount of individual loans. On the other hand, loan applicants have less and less equity capital. Desired properties are being borrowed against much more intensively. Today, people who want to buy do not even put up 20 percent of their own money.
Ancillary purchase costs have also risen enormously: Since notary and estate agent fees as well as land transfer tax have to be paid by the buyer, on average even less equity capital remains. As a result, the loan-to-value ratios are rising overall. This trend is logically understandable, because the savings of prospective buyers are not growing at the same pace as the purchase prices. Property prices are currently skyrocketing rather explosively. Prospective homeowners are left behind and find it difficult to keep up.
Fearful buyers who make rash and short-term purchase decisions in the face of rising rents are also responsible for increasing indebtedness. They do not think long enough about whether buying a property makes sense, which leads to a rapid increase in the share of debt in real estate lending. Experts agree that most of the debt capital lent goes to property buyers who tend to act out of fear. It would make more sense and be more sustainable to first build up reserves for a home purchase. In this way, more informed purchase decisions can be made instead of making a rash purchase decision based on rising rents. It is particularly worrying that some frightened buyers even have 100 percent of the purchase price financed and have no savings at all. The banks go along with this and lend high loan-to-value ratios – if there is a good credit rating.
Many buyers are not aware of the fact that they expose themselves to the risk of being indebted and tied down for a long time if they purchase a flat or house without equity. In general, it is not considered very responsible in the Federal Republic to finance a property 100 per cent. If you don’t have the necessary small change, you should leave it alone, is a widespread belief. In other countries, people take a morally more relaxed view of real estate loans like these and therefore do not fear a systemic collapse, whereas in Germany people argue in a much more down-to-earth way. Many financial experts agree that 100-percent financing can be quite viable. This is the case if a good income is available and an appropriate repayment and regular unscheduled repayments are made. In this way, even frightened buyers do not run the risk of not being able to repay the loan. Another argument in favour of all-in financing is that average interest rates on loans for flats and houses have recently fallen again. So it seems that real estate loans are affordable and thus a worthwhile investment in the future. Which inspires prospective real estate buyers to take the risk of a less well-considered property purchase.
However, there is also a serious danger in this very temptation: the lower the interest rate and the initial repayment, the longer fearful buyers expose themselves to debt. Sometimes it can take up to 40 years or more to get out of debt. This is especially the case with two percent interest and repayment. Experts recommend resisting such bait-and-switch offers and agreeing on an annual instalment of at least five percent from interest and repayment. In addition, prospective buyers should plan for regular unscheduled repayments in order to pay off the mountain of debt more quickly.
Many guarantors are also not aware of how the mechanics of the classic annuity loan work. Here, there is also an interest effect, but it is the other way round. The interest amount is replaced by the repayment amount over the years.