Types of loans: Which loan is right for me?

 

The cheapest type of loan to finance your project.

We explain the different TYPES of loans understandably.

What are the advantages and disadvantages of the different types of loans?

Here, you will discover how certain types of loans work, their advantages and disadvantages, and which would be suitable for financing your project.

Every real estate project is unique and complex. To implement this project, you need real estate financing as a basis, which can sometimes be at least as multifaceted. The same type of loan is often given unique names by different banks, so you will come across many different loan names that basically mean the same thing.

Please don't let this confuse you. We would be happy to help you find a cheap loan that suits you for your property and a variant of it that is tailored to your personal project.

Which types of loans are suitable for your real estate financing?

The type of loan that is right for you will be found after you have provided your information, which depends on your preferences. I will then select the loan from which you will benefit the most.

First, indicate whether this is entirely new, interim, or follow-up financing. In this way, we narrow down the range of possible types of credit.

If you are unsure about this, answering these questions can give you clarity:

• Financing a property for the first time?
• Are you a property owner planning to buy or build another property?

Then, it is a matter of new financing.

• If you already have real estate financing and the fixed interest rate is about to expire, you will need follow-up financing.
• You will need interim financing to finance a new property using equity, which will be available shortly. The equity can come, for example, from the sale of a property you own or from the payout of a life insurance policy.

The advantages and disadvantages of the most important types of loans at a glance

This overview compares the advantages and disadvantages of the most important types of loans.

These types of loans are available for new financing

When it comes to initial funding for constructing or purchasing your property, you can choose one of the following loans. If you click on the name of the financing type, you will receive more detailed information about the respective kind of financing.

• Annuity loan: The Germans' favorite form of real estate financing among repayment loans: The interest rate is guaranteed to stay the same.
• Final loan: Everything is paid at once at the end.
• Constant loan: Security comes first.
• Building savings contract: Solid and long-lasting.
• Cancellable loans: Separation is relatively easy.
• Combined loan: High flexibility and a fixed interest rate with low interest rates.
• KfW loan: The state issues subsidized loans.

You can finance a property for the first time with all these financing types. Each of these loans can have various advantages as well as disadvantages.

Annuity loan

With an annuity loan, you have a high level of planning security, as the monthly loan payment always remains the same. This is ideal for borrowers who place a high value on safety. It can be a disadvantage that you usually need follow-up financing, which carries the risk of a change in the interest rate.

Full repayment loan

A complete repayment loan is an annuity loan in which the fixed interest rate remains unchanged over the loan term. This means you do not need any follow-up financing, and the conditions are secured until the loan is repaid (total repayment calculator). Limiting the loan term can lead to higher repayment rates and high loan installments.

Final loan

Final loans are also known as repayment-free loans or fixed-term loans. You can pay off this type of loan using a repayment replacement product. This can be capital life insurance or a building savings contract. A capital contribution at the end of the term can also be used as a repayment instrument. Although the interest costs are higher during the time than other loans, this form of financing can bring tax advantages for investors if the property is rented out.

Constant loan

A combination of a bullet loan, as the repayment-free advance loan is also called, and a building savings contract is called a constant loan. The advantage is total interest rate security for the entire loan term; the disadvantage is the high closing fee for building savings contracts.

Building savings contract/building savings loan

You can use your building savings contract to finance a property purchase or a construction project you want to complete. It can also be used to repay an advance loan at the end of its grace period. The building savings contract is a suitable means of securing low-interest rates. If you combine it with an annuity loan, you can be sure that interest rate increases will not affect the remaining debt. At best, the allocation of the building society loan remains a risk, as the building societies cannot guarantee the relevant point in time. Furthermore, a closing fee is due when the building savings contract is concluded.

Cancellable loans

A cancellable loan is nothing other than an annuity loan with an additional agreement that excludes early repayment penalties if the loan is terminated at short notice. You must pay the lender an interest surcharge to get this quick repayment option.

Combination loan

This type of loan combines your annuity loan with a variable loan. The advantage is that you can benefit from a fixed interest rate and still be assured of the current interest rate level. The variable part of the loan can be repaid in whole or in part every three months. With this type of financing, there is a risk that interest rates will rise. The conditions are adjusted every three months to reflect the current financial market interest rate.

KfW loan / KfW funding

With financing via a KfW loan, you can receive meager interest rates, repayment-free initial years, and possibly even subsidies for repayment. A combination with other funding is also possible without any problems. The only downer is the cap on the loan amounts, and there is also a limit on the interest rates, and the terms of the KfW loans are also limited.

Types of loans for follow-up financing

The associated fixed interest rate will expire shortly if you own a property and the financing was previously carried out via an annuity loan. The remaining debt is the amount you still need to repay by then. You need follow-up financing for this remaining debt. In addition to KfW loans, you can use all types suitable for new funding or follow-up financing. Only KfW Bank does not provide follow-up financing. However, we have another exciting way you can get follow-up financing. You will receive further information if you click on the name of the relevant loan type.

Forward loan

With a forward loan, you can secure the current low-interest rates in the future.
Your lending institution will usually make you a so-called extension offer. If you accept this extension offer, you will receive follow-up financing with new interest rates from the lending bank. Often, these offers are not as good as current market interest rates would allow. Comparative offers from other real estate financiers are necessary if you want to save money. By switching to another financing partner, you often save a lot of money and can also shorten the term of the loan.

With the forward loan, you can benefit from the current interest rate in the future.

With the forward loan, you have a remarkable form of financing. Provided you take care of it in time. With a forward loan, you can have the current market interest rate fixed for up to five years before your fixed interest rate expires. This is particularly advantageous in phases of meager and moderate interest rates, as it is quite possible that interest rates for construction and real estate will rise again, and you will have to cope with significantly higher interest rates on your follow-up financing. This early securing of low-interest rates for follow-up financing is accompanied by an interest surcharge that depends on the duration of the forward phase.

Types of loans for interim financing

If you need to bridge a time gap in your financing, interim financing comes into play. Whenever you need a certain amount of money at a particular time, you don't get it until later.

If you have to move to another city for work reasons and want to buy a house or apartment there. Of course, you want to pay for the purchase of the new property with the money you earn from selling the old property. Of course, it can now happen that you have to pay for the new property before you have sold your previous property. To bridge this time gap, you can take advantage of interim financing.

Another case can also be solved with the help of interim financing: You have found the property of your dreams and want to pay for the purchase with your capital life insurance. Since this will only be paid out in a few years, you can also bridge the time until then with interim financing.

You can cover your interim financing with floating-interest fixed-interest loans. Simply click on the name of the loan type, and you will receive further information.

Final loan: Everything is paid at once at the end.

Variable loan: involves a certain amount of risk.

Cap loan: The interest rate risk is capped.

The classic annuity loan is unsuitable for interim financing because it is not flexible enough to pay off the remaining debt at short notice without paying an early repayment penalty.

This variant of the bullet loan is actual interim financing.

This model for actual interim financing is based on a bullet loan with a loan term of between 6 and a maximum of 24 months. You only pay the interest on the loan during that time, which keeps the monthly burden low. This variant of real estate financing has the enormous advantage that the fixed interest rate includes guaranteed interest rate security for the short term. However, this security does not exist with variable loans or CAP loans. As soon as you no longer need the financing, you can cancel it anytime and repay the loan without any prepayment penalty.

Variable loan

A loan that does not have a fixed interest rate is called a variable loan. You can repay a variable loan every three months without paying an early repayment penalty. The interest rate is based on EURIBOR and is adjusted every three months. This can be a risk when interest rates rise because both the monthly payments and the costs of the loan increase with the higher interest rates. A variable loan is easily convertible to a fixed-interest rate annuity loan if you no longer need the underlying flexibility.

Cap loans

Sharply rising interest rates on a variable loan are an unpleasant surprise you can protect yourself from with a CAP loan. The interest rate in this variant is capped. You set an interest rate cap with the lender, which is limited by the CAP, as the lid is called in English, and is not exceeded, regardless of the development of money market interest rates. This is the secured version of a variable loan. However, the lending banks also have this protection paid for. CAP loans can be converted into fixed interest-rate annuity loans like the other variable loans.

If you still need to decide on a specific type of loan, we will be happy to support you.

Even if you are still determining which type of loan is right for your project, we are happy to help you. We look forward to hearing from you and looking for the most suitable financing for your project.