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Before we talk about financing real estate: Because of the sharp rise in prices, many interested parties can hardly afford home ownership today. How come
Michael Bader: The Covid-19 pandemic has further fueled the already high demand for real estate. After the experience in lockdown and home office, many people try to improve their living situation. In view of the already scarce supply, prices on the market have exploded. When a property comes on the market today, applicants stand in line. That is why many sellers carry out a bidding process, which often results in excessive sales prices. Because the banks carefully finance such properties, interested parties have to inject significantly more equity. In the end, these properties can only be afforded by those who have the necessary financial reserves.
Despite the persistently low interest rates?
It is crucial that you get the necessary financing from lenders such as banks, pension funds and insurance companies. And this depends less on the burden of the real mortgage interest to be paid than on the imputed affordability, which is calculated internally at most financial institutions with an imputed interest of up to 5 percent. The search for the best financing and the cheapest mortgage is all the more important.
Interest rates rose slightly again in August. What do you attribute this to?
The trend has been steadily down over the past few years because the central banks are flooding the markets with money. The development of interest rates is, however, linked to the market value of corporate and government bonds. With the bonds, a repayment and interest promise is given, which in turn is linked to a default risk. As soon as the latter increases, interest rates have to rise. The mechanism was easy to understand in the past months of the pandemic up to the present development.
In view of the numerous uncertainties, the lockdown in spring 2020 led to a sharp rise in interest rates. With the first opening steps, the situation eased again and interest rates fell. Most recently in August 2021, the latest virus mutations, the increasing number of infections and future concerns from the Federal Council and experts led to an increase. Because another lockdown would have massive negative effects on companies.
So should mortgage borrowers take advantage of the low interest rates and seek a quick deal?
Consumers have been advised to do this for years – but most of the time it turned out differently. It is more worthwhile to analyze the development of the swap rates soberly. This shows how financial institutions refinance themselves over the long term. They are therefore an objective barometer for interest rate developments. It is advisable to seek independent advice here. The advisors know what interest rates are possible on the market at any given time and will try to negotiate the best conditions for their customers. After all, they earn the same amount, no matter how high or low the interest rates are.
«You shouldn’t be blinded by so-called shop window rates on the Internet. There apples are compared with pears. “
Otherwise it was always said that you should get offers from as many providers as possible in order to get the best conditions. Is that no longer the case?
In fact, apples are often compared to pears. Often, for example, the offers do not refer to the same reference date, which means that the interest rates vary widely. In addition, some customers lack the know-how in the field.
Many consumers fear that they will have to pay higher interest rates to independent advisors.
This is because they search for mortgage rates themselves on the Internet and let themselves be dazzled by so-called shop window rates. However, these are only indicative.
How else should one proceed?
The easiest way is to ask an independent broker like FinanceScout24. Its job is to negotiate the best conditions for customers.
Which factors are relevant when calculating a mortgage?
The decisive factor is the property’s lending value. If this is lower than the purchase price, then you will have to bring in more own funds. And if you want to increase your mortgage later, for example to install a new heating or kitchen, this is only possible if the value of the property allows enough scope for an increase. The value of the property is essential for financing. That is why we carry out a valuation of the property ourselves with all of our inquiries and consultations using standard banking valuation tools. This gives an indication of the real value of the object.
What else counts
The personal situation, i.e. the creditworthiness of the customers, is also particularly important. It is common nowadays to use risk-based pricing: our financing partners calculate a tailor-made interest rate depending on the positive or negative potential. It is not only the portability that counts, i.e. whether one can afford the property, but also what consequences the purchase has on the overall situation, whether follow-up business is possible and the income develops. This makes professional negotiations by trained staff all the more important. The actual financing structure also plays an important role. It is crucial that you make the best choice for your personal situation in terms of the type of mortgage, the term and any tranches.
“From an interest rate strategy perspective, a tranching does not make sense unless one is planning an amortization.”
In the current situation, many customers prefer a fixed-rate mortgage. What are the pros?
The type of financing has changed significantly over the past five years. Because of the very low interest rates, many people who used to take out a money market mortgage, i.e. Libor or now Saron, prefer fixed-rate mortgages today. Since with the Saron the customer bears the full interest rate risk, this is currently only worthwhile for customers who are looking for very flexible financing or who want to amortize in short periods of time. A fixed-rate mortgage with a term of five years is currently readily available at better or at least the same terms as a Saron mortgage. And despite the current uncertain situation around an emerging fourth wave in autumn, 10-year fixed-rate mortgages are still very cheap and at the moment at FinanceScout24 available from 0.63 percent *. This of course depends on the credit score mentioned above and the condition and quality of the property
Should you still take out your mortgage in tranches? What are the advantages and disadvantages?
Tranches, especially those that are far apart, bind customers to one financing partner over the long term. This is why the following principle applies: as few tranches as possible, as many as necessary. From an interest rate strategy perspective, a tranching does not make sense unless you are planning an amortization.
Is it worth using a platform like FinanceScout24 for a mortgage that is about to expire or to be extended?
First of all: It is often easier and more convenient to stay with the previous provider when it comes to extending the mortgage. It’s not a secret. But even if you already know affordability, lending, etc., it does not mean that your own bank necessarily makes the best offer. Many users are therefore actively looking for our advice and interest rates. Very often we can again negotiate much more attractive offers for the user in the market.
When should I even start taking care of my mortgage repayment? 1 month, 6 months, 12 months, 24 months before expiration?
There is no generally applicable rule here, because the interest rate development and pricing of the providers is complex, depending on how you refinance yourself on the market. There are providers who calculate the interest on a daily basis and add a risk surcharge for the future expected interest rate development, which is higher the further the financing is in the future. Others offer fixed interest rates up to 12 months before payment without such a “forward”. The lower the general interest rate at the moment, the more profitable it can be to start redemptions 12, 18 or 24 months in advance. FinanceScout24 advises objectively and gives a recommendation based on the customer and market situation and negotiates the best offers.
You said beforehand that switching to a different provider could make sense. What are the reasons?
It starts with the savings through significantly better interest rates up to a reduction or the complete elimination of amortization, because a new provider is willing to take a property into his books for a significantly higher value. This can be because he can assess the local market better or – quite banally – uses a different assessment tool than the house bank and then comes to a higher value.
Is there a cost to change?
As a rule, there are no or only low costs and fees for the repayment when a mortgage expires. There are a few exceptions, however, as banks charge a small fee for dissolving the mortgage when switching to another financing partner. A small fee is also charged for rewriting or increasing the mortgage notes at the land registry or notary’s office. However, the lower interest rates quickly make up for such fees. It is important to observe any notice periods so that you do not miss the date for the change and have to finance expensive interim financing with a variable mortgage. We know these obstacles and accompany our customers to the new provider in a “cost-saving way”.
“We know the market and usually know exactly where to place an inquiry sensibly in order to get the best possible financing.”
In summary: There is not ONE bank that offers the best interest day in and day out, but rather a complex interaction of several factors that you have to know in order to find out the best financing on the market. This is not a question of perfect search strategies on the Internet, but the daily job of a good scout who knows exactly where to take his customers and with whom to negotiate in order to get the best financing on the market. And with us, the users are in the right place.
* Stand 03.09.21
FinanceScout24 (www.financescout24.ch) is the first thinking digital partner for the most important finance and insurance topics in life. As a one-stop shop, FinanceScout24 enables the comparison and conclusion of mortgages, motor vehicle insurance and consumer loans and provides users with background knowledge and advice on all these topics. FinanceScout24 is part of Scout24 Schweiz AG (www.scout24.ch).