Primarily due to the current low interest rates on construction financing or a construction loan, many consumers are currently buying a property and taking out construction financing in the process. In many cases, this does not necessarily involve a large amount of equity capital.
If the monthly installments are nevertheless easy to bear, there is no problem in principle to carry out construction financing even in this case. Even if, for example, only 10 percent of the financing amount is available as equity capital.
However, due to the borrowers' lack of equity for financing, many construction loans are classified above a certain amount or limit. The credit line 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 in a mortgage loan??
In the field of construction financing, the 60 percent mentioned has a great significance. This is the limit set by most banks as the lending limit for a senior mortgage loan – this is first 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 200.000 euros. As a result, the customer does not immediately receive a loan for this entire amount. It is, so to speak, a risk discount 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 in the process.
For this reason, the value of the loan from the bank is not set at 100 percent, but at 200 percent, for example.000 euro. Instead, the borrower receives 60 percent of the value. So in this case 120.000 euro. This 120.000 euros can, however, be borrowed as a very favorable first-ranking loan in most cases. 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. In the first place, this refers to the ranking in the land register. The mortgage is the first security for the loan in the land register – this is referred to as 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 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 with another real estate loan.
This credit is usually a construction loan, which covers the gap between the sixty percent mentioned and the total requirement for the financing.
Such a loan, of course, cannot be secured as a first mortgage. This is only valid up to a loan value of 60 percent. This is where the so-called 1b mortgage comes in, which covers the remaining part of the financing requirement. In practice, this can usually amount to as much as 80 percent of the mortgage lending value. In many cases, the banks here also offer a full 90 to 95 percent of the loan value, so that there is basically almost full financing.
Subordinated security for a home savings loan
Subordinated security plays a major role not only in real estate financing, which is made with an annuity loan. Versions 1a as well as 1b are also of great importance for home loans. In the case of a home loan, the repayment amount is fixed right from the start. Thus, real estate financing is based on subordinated collateral in almost every case.
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 savings bank. This circumstance leads to the fact that in most cases – at least this is the rule – the first-ranking security is provided by the bank as the lender. The building society settles for a subordinated land charge or mortgage.
Can subordinated security affect loan terms and conditions?
The customer basically and in principle has many advantages with a loan from a building and loan association. The fixed redemption and the elimination of the possibly changed interest rates are to be mentioned here quite clearly. The customer still does not have to fear that a subordinated security could have negative effects on the conditions.
It is even the case that with a loan from the building society, which is integrated into a real estate financing, that often the interest rate conditions are even better than with a first-ranking mortgage loan. This point is certainly also a reason why many borrowers today include the building loan – even to a larger extent – in the financing of a property.
What are the differences in terms and conditions??
There are, of course, differences between the two varieties of mortgages. These are not only related to the rank of the collateral, but also have a real impact on the borrower. In some cases, there are significant differences between the interest rates for a 1a mortgage and a 1b mortgage.
For the banks, the fact is that lending up to 80 percent of the corresponding market value involves risk. This is higher than a mortgage, which only covers 60 percent of the financing needs. For a 1b mortgage, the borrower therefore has to accept a higher interest rate in most cases than is due for a 1a loan as part of construction financing. Depending on the bank, borrowers can expect a difference of between 0.3 and 0.9 percentage points between a 1a mortgage and a 1b mortgage.
For this reason, a borrower should always try to include as much equity capital as possible in the financing. Ideally, this can make a big difference and, in the best case, a 1b mortgage can be avoided altogether.
But in any case, an attempt should be made not to have additional capital needs beyond the real estate loan, which is secured by the 1b mortgage, and to cover them with a loan. In this case, more than 80 or even 90 percent of the required amount would have to be financed from external sources. The loan portion would then increase again significantly.
The 1a mortgage and the 1b mortgage do 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 in the best case.