Mortgage as collateral – this is how much money is available

If you want to have a real estate loan, then you need to provide collateral to the lender. Although often in connection with a real estate financing is still spoken of the mortgage. However, banks have been accepting a land charge much more frequently for many years, so that the mortgage is now only used relatively rarely.

In our article, we would like to discuss how much money you receive as a real estate loan if you have a mortgage or a mortgage loan. Land charge as security place. In this context, we answer, among other things, the question of what the mortgage lending value is, how banks calculate it, what documents you need to submit and what the so-called lending limit is all about.

What is the difference between a mortgage and a land charge as collateral??

Both a mortgage and a land charge are so-called liens on real property. This gives lending banks the option of initiating a foreclosure sale of the property should the borrower no longer be able to meet his or her obligations. Land charges and mortgages are therefore extremely important loan collateral for lenders.

In essence, the difference between Grundschuld on the one hand and mortgage on the other is that Grundschulden are not strictly accessory, but the mortgage is already. This means that land charges can also be used for other loans, while the mortgage is always strictly related to a specific loan. With the land charge, banks therefore have a little more freedom in the security, so that this is used in the last ten years significantly more often than the mortgage.

However, except for this difference, mortgage and land charge function very similarly. In terms of collateralization in particular, both variants of the security right over real property can basically be treated in the same way. Therefore, we speak in the further course of our contribution on predominantly from the mortgage 1 Compare mortgage rates – https://www.test.en/real-estate-financing-step-by-step-to-credit-5294522-0/ – Retrieved on 04.11.22 , although the same principles apply to the land charge in terms of mortgage lending value and collateral.

In practice, most banks today accept a land charge as collateral. For the calculation of the mortgage lending value as a basis for how much money you will receive, however, the difference to the mortgage usually does not matter

How much money will I receive from the bank – the mortgage lending value

One of the most frequently asked questions among borrowers who need real estate financing is how much money they will actually receive from the bank. A common misconception in this context is that credit institutions provide at least the current market value of the property as a loan. However, this is not the case, because the banks are primarily based on the so-called mortgage lending value. But what is it actually?

The mortgage lending value refers to the amount that the credit institution as lender would probably still receive in 5, 10 or 15 years' time if the property in question had to be foreclosed on as collateral. Therefore, the mortgage lending value is of course (significantly) lower than the current market value of the house or condominium. In the context of real estate financing, therefore, there are several, relevant terms, but it is essential to separate them, namely:

• Purchase price
• Building costs
• Market value
• Mortgage lending value
• LTV

In most cases, banks make a safety deduction from the market value in order to arrive at the mortgage lending value. In relation to the purchase price or the construction costs, the mortgage lending value is usually 80 percent. We would like to illustrate what this means in the following example.

• Purchase price of the property: 280.000 Euro
• Market value: 270.000 euros
• Discount from the market value: 20 percent
• Mortgage lending value: 216.000 euros

In this example two differences stand out. On the one hand, the market value determined by the bank is somewhat lower than the purchase price paid. If you want so, the house buyer paid thus somewhat too much for its object. However, this is quite common, because the market value and the actual purchase price do not always coincide. Here also depends a lot on supply and demand.

The second difference is between the market value and the mortgage lending value, which in the example case is slightly more than 50.000 euros was set lower. Here, the bank calculates a customary security discount of 20 percent so that it can be relatively sure that it will receive at least approximately the mortgage lending value in the event of a later forced sale and thus, in the ideal case, the loan debt can be fully covered.

How does the calculation of the mortgage lending value take place?

Banks, of course, do not calculate the mortgage lending value for a property and, consequently, for the real estate loan on the basis of estimates, but there are three different calculation methods available for this purpose at once. These are:

• Comparative value procedure
• Material value method
• Yield value procedure

The comparative value method is used very frequently, especially when the mortgage lending value is to be determined primarily for single-family or two-family houses and owner-occupied apartments. In the comparative value method, the property in question is usually compared to houses in the neighborhood that have similar living space and amenities.

An alternative calculation method is the asset value method. This also usually comes into play when the property in question is used by the owner himself. In this case, the mortgage lending value consists of the land value and the construction value.

The third method of calculation is the capitalized earnings method. However, this is primarily used for properties that are used for commercial purposes or as a. are rented out. In this case, the mortgage lending value is the sum of the land value on the one hand and the rental income on the other hand, which should flow in the future.

What documents must the borrower submit?

In order for the bank to be able to calculate the mortgage lending value as realistically as possible, it requires some documents from the loan seeker. On the basis of these documents it is for example evident which condition the real estate has, how the situation is formed and still further for the determination of the mortgage lending value relevant information can be derived. It is also a question of assessing the creditworthiness of the borrower, because this definitely has an influence on how high the bank sets the security discount, for example.

Important documents are in the first place:

• Building plans for the property
• Expose
• Living space calculation
• Land register payment
• Site plan
• Insurance documents (with regard to the property)
• Proof of equity

The bank can then use all of these components, at least in part, to calculate the mortgage lending value.

What is the loan-to-value ratio?

The so-called lending limit is to be distinguished from the mortgage lending value. Almost all banks make a further deduction from the calculated mortgage lending value, which should be called a risk discount. This is to take into account any declines in the value of the property, which of course can occur over a 10, 20 or 30 year horizon in the future. In addition, there are both internal and external factors that can negatively affect the value of the property, such as:

• Location becomes less attractive, for example due to other new buildings
• Condition of the property deteriorates
• Damage to the property that is not covered

This security discount on the part of the banks is not insignificant, as it often amounts to 30 to 60 percent. However, this does not explicitly refer to mortgages or land charges, but applies to loan collateral in general. Nevertheless, the loan-to-value ratio is sometimes much lower than the mortgage lending value, even for real estate, as the following example will show:

• Market value of the house: 300.000 euros
• Mortgage lending value: 240.000 euros (80 percent of the market value)
• Mortgage lending limit: 144.000 euros (60 percent of the mortgage lending value)

This exemplary calculation shows that the loan-to-value ratio ultimately only accounts for just under half of the market value of the property. Exactly for this amount, i.e. the lending limit, a normally first-ranking mortgage or land charge is then required on the part of the bank. In the end, however, this is only partly the answer to the question of how much money you will receive from the bank.

Real estate financing often provided with equity

If we now stay with the example, however, you do not have to get a fright that the bank would lend you far too little money so that you can buy the desired property. The idea behind this is that most real estate financing does not require so-called full financing. So you can ideally even cover the entire difference between the market value (purchase price) and the mortgage lending value by equity capital. This is one of the reasons why equity is so important in construction financing, because it allows you to benefit from the following advantages:

• Loan approval becomes more likely
• More favorable building interest than without equity capital
• More stable financing

If the equity is not enough for you to completely close the gap between the purchase price and the loan-to-value ratio, most lending institutions will provide another loan as part of the construction financing process. This will either be given as a blank loan or you may be able to provide other collateral, such as the pledge of securities or the assignment of a claim, preferably in the practice of an endowment policy.

In addition, it is often the case that real estate financing consists not only of a first-ranking annuity loan with registered mortgage or. Land charge of the bank exists. It is not uncommon for a so-called financing mix to be used, which is then composed of the following components, for example:

• Annuity loan (secured by first-ranking mortgage or land charge)
• Building society loan
• KfW subsidized loan

The two other loans therefore also help to close the gap between the market value (purchase price) and the bank's lending value. Therefore, in most cases, you actually receive as much money from the bank in the context of a construction financing as you need financing of the construction costs or purchase price.