People who own real estate are financially more successful. This is shown in various studies, including that of the German Bundesbank. Homeowners are around ten times as wealthy as tenants. This is highlighted in an analysis of the German Institute for Economic Research (DIW). The reasoning behind this is relatively simple: homeowners benefit from the steady increase in value of their properties. The current low mortgage interest rates also makes it easier for them to build up a financial buffer and be well off.
When it comes to your mortgage, however, there are four mistakes that Germans in particular often fall into. Such mistakes could keep you from (more fully) enjoying the financial benefits of homeownership.
1. Accumulating equity for too long
Many people make the mistake of accumulating savings for too long that they actually don't need. Those who bring equity will receive a mortgage at better conditions. But beyond a downpayment of 5% the marginal benefits are often modest. Oftentimes a lot less equity is sufficient for a mortgage than expected. By saving for a long time, you will forgo the increasing property value and pay high rent.
As you can see from the table above, the more equity you put down, the lower the interest rate. However, beyond 5% the interest rate less with each step.
With Hypofriend’s affordability calculator you find out how much a property you can up to given your available equity.
2. Going for too small a property, using instead the savings for paying down the mortgage
The more savings you have, the more house you can afford. But it is precisely this simple equation that many real estate buyers do not take into account. Instead of using their equity to maximize the house they can afford, they use the money as a down payment on the loan.
It generally is a smarter strategy to buy more house when interest rates are this low, but then reduce your risk by fixing the rate for a longer period. In this way you can benefit from the gradual price increases of a bigger asset and also enjoy more space.
Your financial advisor from Hypofriend will show you how much equity makes sense for your mortgage, and how your net worth can evolve depending on the size of house you buy/downpayment you make.
3. Paying off the loan too quickly
Repaying your loan quickly could be a mistake? Yes, because rarely has borrowed money been as cheap as it is today. Instead of putting your savings into paying off your mortgage through special repayments, you can invest it elsewhere.
The mortgage interest rates are about one percent. There are plenty of investment opportunities returning (risk adjusted) way more than one percent and it makes more sense to put the money that way and not to invest it in the quick repayment of your loan.
Since banks currently do not pay profitable interest on savings either, it is worth investing the money either in a second property or in the stock market. Don't worry: There are options that can be low cost, modest risk (by spreading the investments very widely and paying a bit insurance or just simply investing for a long time--over long time horizons stocks are less risky as they simply grow with the economy).
4. Getting the wrong fixed interest rate
The fixed-interest phase gives you planning security. However, it should definitely be adapted to your personal situation. For many real estate buyers, it is either too short or too long and this costs you a lot of money.
For example, the security of a long fixed-interest period of 20 years comes with the bank demanding a higher interest rate. But if you plan to live in the property for only ten years and sell it afterwards, your loan will cost you more than necessary.
If, on the other hand, you plan to live in your own home for twenty years, you should fix the interest rate for a longer period. Because if it expires after ten years, you will need follow-up financing. Interest rates have been much higher historically, and it could be that you will have to pay considerably more for follow-up financing.
At Hypofriend we use advanced interest rate forecasting techniques. We don't have a crystal ball, but these models are better than wild amateur guesses. Importantly, we look at the speed of your repayment, the risks that you can carry given your income outlook, and weigh that with the cost of fixing the interest rate longer. We show you how you can make this assessment.
As you have seen, there are some things to consider when choosing a mortgage. You should absolutely avoid these four mistakes in your mortgage. They can cost you up to 50 percent of the purchase price over the lifetime of owning your house. Your Hypofriend mortgage advisor will accompany you throughout the entire process and help you optimize your finances. For your long-term financial well being. So you can enjoy your dream home.