Effective interest cheaper than debit interest – how does it work?
Anyone who is about to buy a property or needs follow-up financing should in any case compare the different borrowing rates and effective interest rates of the financing offers. The interest margin of the different offers is very high. Between the top and the flop offerer of real estate financing are often around 0.75 percentage points. Over the entire time of the interest rate commitment, this supposedly small interest differential adds up to a decent amount.
But many home builders and follow-up financiers lose track of the numerous offers on the market and can be dazzled by allegedly favorable financing models. DTW | Real Estate Finance introduces two different models that you should definitely recalculate.
Model 2 – effective interest rates cheaper than debit interest – how does it work?
The effective interest rate of a mortgage or real estate financing looks at many savings banks for some time cheaper than the borrowing rate! What happened?
Reason for financing: Buying a property new follow-up financing Type of property: condominium detached house Two family house Apartment house Semi-detached house Offer without obligation
and request for free
Some savings banks advertise with misleading effective annual interest rates. Often, the effective interest rate for real estate financing is even below the borrowing rate of the construction loan. How can that be? The fixed borrowing rate – previously nominal interest rate – indicates how much interest the borrower has to pay to his bank. In addition, the effective interest rate includes further borrowing costs such as processing fees, agency fees and the consideration of the inter-annual interest and principal clearing on the credit account. Therefore, the effective interest rate should be higher than the borrowing rate (nominal rate). So far, one could rely on this assumption and the lender’s effective rate was a benchmark to compare loan offers.
This is now over, if it goes to the calculations of some savings banks. The institutes are extremely strict about the new law. A small change in the price regulation is to blame for a computer chaos. The regulation now stipulates that the effective interest rate should no longer be calculated for the duration of the interest rate commitment, but for the entire term of the loan. This is the implementation of an EU directive that aims to set a common effective interest rate calculation throughout Europe. Actually meant well!
However, in order to determine the effective interest rate for the entire term, assumptions about the interest rate after the end of the fixed interest period are inevitably necessary. However, how much interest the bank will demand in the future is completely unclear.
This new regulation has no consequences for most banks, as they continue to calculate at the contractually agreed interest rate for the period following expiry of the fixed interest rate . With this type of calculation the same effective interest comes out as after the old regulation. Not so with many savings banks. Some of the contracts of these institutions stipulate that the construction loan continues to run after the interest rate commitment with the variable interest rate. According to the Price Indication Regulation, some institutions of the Savings Banks Association now use their current interest rate for variable-interest construction loans for the calculation of the effective interest rate. Since the variable interest rate for most banks is well below the interest rate for a loan with a long-term fixed interest rate, this significantly lowers the effective interest rate! These interest rates have nothing in common with the true cost of borrowing.
Therefore, ask your bank or savings bank to submit a comparable offer. Take particular care when the borrowing rate – currently nominal interest rate – of your real estate financing is higher than the annual percentage rate.
The consultants of DTW | Real Estate Finance to compare your offers properly. With our comparison calculator you can check if you are using DTW | Real estate financing can save money and if so, how much. Simply enter the key data about the planned real estate financing.