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Borrowing a property: What is the loan value?

What is the loan value?

In most cases, a loan is necessary to finance a property. Real estate financing has even become a very common tool for fulfilling the dream of owning a home. However, in order to finance a property, the bank requires collateral. In most cases, lenders reserve the right to tender the property for foreclosure in the event of insolvency. This is how the debt can eventually be paid off. This type of credit security is also referred to as the lending of a property. Borrowing properties are therefore not a type of real estate, but represent those that actually still belong to the bank until the loan has been repaid.

What does real estate lending mean?

In most cases, a loan is necessary to finance a property. Real estate financing has even become a very common tool for fulfilling the dream of owning a home or Investment properties   to meet. However, in order to finance a property, the bank requires collateral. In most cases, lenders reserve the right to tender the property for foreclosure in the event of insolvency. This is how the debt can eventually be paid off. This type of credit security is also referred to as the lending of a property. Borrowing properties are therefore not a type of real estate, but represent those that actually still belong to the bank until the loan has been repaid.

Borrowing values and loan limit

Before the loan is granted to a customer, the loan value must be determined. However, the valuation of a property is not roughly estimated or simply fixed on the purchase price of the customer. It is based on the provisions of the Pfandbrief Act on the one hand, and on the other hand on the Loan Value Determination Ordinance, or BelWertV for short. The loan value is basically based on the sales value. So not according to the current purchase price of the property, but according to the future selling price. The loan value is slightly between 60 and 90 of this sales value. If the creditworthiness of the customer is correct, the lending institution usually grants 80 of the loan value. With less good credit rating, as is the case with most people, there are around 60.If real estate loans with up to 130 of the sales value are granted, this is a possible special case. However, the credit institution compensates for this higher risk with higher interest rates.

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Determination of the loan value

The value of a property is not simply appreciated by the buyer of the property or by the bank. State-recognised experts make the estimates on the basis of established standards. The decisive criteria for determining the loan value are:

  • Age of the property
  • Market value based on location
  • Local prices for real estate
  • future, possible income and income from the property

In fact, the latter aspect plays a significant role, because borrowers also want to be able to estimate how profitable or profitable the property can be in the future. An expert assessment can also provide certainty with regard to the usually long loan term. Once the tangible value has been calculated, the Bank deducts approximately 10-20 from this amount. This is necessary to hedge any impairment losses that may occur. After all, fires, environmental influences, or other unpredictable events can suddenly reduce value. The so-called security discount is therefore an additional hedge for the bank and a risk minimisation for the borrower. After all, he, too, has to reckon with losses in such cases. Banks are even legally obliged to have a value report prepared. However, from a legal point of view, they must not pass these fees on to the borrower. After all, it is in the bank’s interest to know the value of a property. Likewise, clauses in the credit agreement are not valid and the bank may not require the customer to appoint an expert himself.

Important: Fees are usually due for the determination of a value, or the provision of a value expert. These are also mentioned:

  • Cost of viewing the property
  • Estimated costs

Methods for calculating the loan value

In general, three different methods can be identified by banks to determine the lending value for real estate. Depending on the situation and location, the methods are changed among themselves.

  • the physical value procedure
  • the earned-value method
  • the comparative value method

Normally, none of the methods is used as the sole method. As a rule, the tangible value is considered together with the yield value: the tangible value method usually comes into play when the buyer uses the property himself. This method is used to determine what the property would cost if it were newly built. In this case, the land value, the building value and the land value represent the loan value. In the case of old buildings, impairments are deducted from recent years. The value can be retold very well here, but without taking into account current developments. If real estate is rented out or used commercially, the yield value method is used. In this case, the land value and the expected rental income in the future represent the loan value. So if you want to use a property to make an investment and finally rent it out, you will have to determine the yield value. Residential properties such as condominiums or single-family homes are calculated using the comparative value method. Current market values play a decisive role here. The regional conditions in terms of land prices or the location are important factors for this. Thus, the actual value of the property is shown here. However, there is a disadvantage when the market situations in the given area fluctuate greatly. Also, for a clear comparison, comparable objects must be found.

Guidelines for loan valuation

Credit institutions differ in their guidelines as regards the valuation of real estate. Often, the Bank does not set the guidelines entirely by itself, but is oriented towards private banks and their regulations. In the case of savings banks, it is the country-specific lending principles that describe valuation. The requirements of the BelWertV are listed here in more detail and in more concrete form. Valuation guidelines have also been published by the Federal Association.

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Borrowing value and market value - are there differences?

A loan value can be understood as a possible future value. This is a value that is likely to be reached in the future, provided that nothing comes in between. The market value, on the other hand, describes the actual value of a property. The purchase price is usually based on it, because sellers sell their property on the basis of current market values.

Does the loan belong in the land register?

After a loan has been promised, credit institutions usually insist on being entered in the land register in the same way. At best, this should even be a first-class entry. In the case of forced auctions, this rank is significant and describes that the bank is satisfied first. Accordingly, the loan is always entered in the land register.

Investing in a secure future

The E1 Investments concept offers a proven system for the solid development of a business as a broker and owner of a real estate business. E1 Real Estate has the infrastructure and operating systems that enable us to offer first-class services with a team of brokers. You are investing in the market of the future.

Pros and cons of loan properties

The loan of a property is a kind of rescue for the bank. However, secured properties have the advantage that they can be financed on more favourable terms. Thus, both sides benefit from this. The bank keeps a valuable deposit in its hands, homeowners can start building a property or buying it directly.

Impact on the financing of total financing

The loan value and the loan limit affect the amount of the loan, but also the equity required for financing. If the property is borrowed at 60, more equity must be raised than would be the case with 80 loans. Thus, the loan has an influence on the Eigenkapital.Je according to the amount of the lending limit, the interest rate is also determined. In general, it can be stated that the higher the share of equity, the more favourable the interest on loans. With a 60-loan, you usually get better offers than with higher loans. If you can’t raise equity at all, you have to expect even higher interest rates. Questions arise about profitability and risk.

For example: If the loan value is 225,000 euros and a 60-loan can be expected, the equity share is 100,000 euros at a maximum loan of 150,000 euros. At 80 and the same loan value, the equity share drops to 70,000 euros and the loan rises to 180,000 euros.

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