Particularly due to the current low interest rates for construction financing or a construction loan, many consumers are currently buying a property and taking out construction financing in the process. In many cases there is not necessarily a large amount of equity available.
If the monthly installments are nevertheless well bearable, there is no problem in principle to carry out a construction financing also in this case. Even if, for example, only 10 percent of the financing amount is available as equity capital.
It is, however, that due to the lack of equity of the borrowers for the financing, many construction loans from a certain amount or a limit exceeded are sorted into classes. The credit limit available in each case is specified by the lending institution – usually the bank. This is usually around 60 percent of the total requirement for the financing and describes the lending limit.
What role does the 60 percent mark play for a mortgage loan??
In the area of construction financing, the aforementioned 60 percent has a great deal of significance. This limit is set by most banks as the lending limit for a first-ranking mortgage loan – this is in first place in the land register.
In concrete terms, this means that the market value of the property to be financed must first be determined. For example, this determined market value could be at 200.000 euros. As a result, the customer does not immediately receive a loan for this entire amount. A risk discount, so to speak, is deducted by the bank. There is a clear reason for this: if the property has to be foreclosed at some point due to payment difficulties on the part of the borrower, it is not necessarily likely that the currently determined market value can be achieved.
For this reason, the value for the loan by the bank is not set at 100 percent, for example, just 200.000 euros. Instead, the borrower receives 60 percent of the value of the loan. So in this case 120.000 euros. This 120.However, in most cases, EUR 000 can be borrowed as a very favorable first-ranking loan. It is then secured with a first-ranking land charge or a corresponding mortgage.
This first-ranking security is known in professional circles as a 1a mortgage. First and foremost, this refers to the ranking in the land register. The mortgage is the security for the loan in the first place in the land register – accordingly, one speaks of a first-rank mortgage or land charge.
What exactly is a 1b mortgage??
In addition to a first-ranking mortgage or land charge, which can be used to secure a first-ranking mortgage loan with up to 60 percent of the market value, there is still a corresponding residual financing requirement that must be covered by another real estate loan.
This loan is usually a construction loan, which covers the gap between the addressed sixty percent as well as the entire need for financing.
Such a loan, of course, can not be secured as a first-rank mortgage. It only goes up to a loan-to-value of 60 percent. This is where the so-called 1b mortgage comes into play, which covers the remaining part of the financing requirement. In practice, this can usually be up to 80 percent of the mortgage lending value. In many cases, the banks offer 90 to 95 percent of the mortgage lending value, so that in principle there is almost full financing.
Subordinated security for a home savings loan
Subordinated collateral plays a major role not only in real estate financing, which is made with an annuity loan. Also with the building savings loans the versions 1a as well as 1b are of large importance. In the case of a building society loan, the amount of repayment is fixed right from the start. The real estate financing is thus almost always based on a subordinate security.
It is usually the case that the borrower secures the largest part of the real estate financing through a mortgage loan, only a small part is then still financed by the loan from the building society. This circumstance leads to the fact that the first-ranking security is provided in most cases – this is at least the rule – by the bank as a lender. The bausparkasse makes do with a subordinate land charge or mortgage.
Can the subordinate security influence the loan conditions?
The customer has in principle and in principle many advantages with a loan of a building society. The fixed amortization and the elimination of potentially changing interest rates are very clear to mention here. The customer still doesn't have to worry that a subordinated security could have a negative impact on the conditions.
It is even so that with a loan of the building society, which is integrated into a real estate financing, that often the interest conditions are even better than with a first-ranking mortgage loan. The point is certainly also a reason why the building society loan is included today by many borrowers – also to a greater extent – in the financing of a property.
What are the differences in terms and conditions?
There are of course differences between the two types of mortgages. These don't just relate to the rank of collateral; they also have real-world implications for the borrower. In part, there are namely significant differences in terms of interest rates for a 1a mortgage as well as a 1b mortgage.
For the banks, the granting of loans up to 80 percent of the corresponding market value is associated with a risk. This is higher than with a mortgage, which covers only 60 percent of the financing requirement. For a 1b mortgage, the borrower must therefore in most cases accept a higher interest rate than is due for a loan under the construction financing for a 1a loan. Borrowers can expect to see a difference of between 0.3 and 0.9 percentage points between 1a mortgages and 1b mortgages – depending on the bank.
For this reason, a borrower should always try to include as much equity as possible in the financing as well. Ideally, you can already make a lot of progress with this and, in the best case, a 1b mortgage can be avoided altogether.
However, an attempt should definitely be made to not have additional capital needs beyond the real estate loan that is secured by the 1b mortgage and cover them with a loan. In fact, this would then require more than 80 or even 90 percent of the required amount to be funded from outside sources. The loan portion would then increase significantly once again.
The 1a mortgage and the 1b mortgage definitely have their uses and benefits in this way, but for the borrower, taking out a 1b mortgage means higher costs in any case. Therefore, it should be bypassed at best.