Anyone who deals with the topic of mortgage lending comes inevitably in contact with a variety of technical terms. Unfortunately, these terms are not always known, although they are often very important.
Therefore, it is no wonder that our finance experts are often asked what is meant by the loan expiry. Below is the answer.
Definition of Mortgage Lending
The lending expiry is an influencing factor that strongly influences the amount of the loan interest. This influence is given because value informs significantly about the risk associated with funding. As a general rule, the riskier financing is from the Bank’s point of view, the higher the loan interest rate will be.
The focus is on the risk in the event of damage: If the borrower can no longer fulfill his obligations, the bank wants the financial loss as low as possible. It is best, therefore, if the borrower uses as much equity as possible.
This is where mortgage lending comes into play. It expresses the relationship between the cost of the project and the value of the property and the amount of the loan. The larger the share of the loan, the greater the mortgage lending.
The loan is given as a percentage. A lending spell of 60 percent or lower is considered particularly safe. From about this limit is to be expected with the best loan interest. If, on the other hand, the entire price of the property is to be financed, the mortgage lending rate is 100 percent, so that usually the highest interest rate is demanded.
Mortgage lending and loan interest depends entirely on the bank
Whether or not there is a linear connection between mortgage lending and loan interest depends entirely on the bank. The majority of banks work with so-called lending limits. Quite often, a limit is drawn at 80 percent: Who can use at least 20 percent equity, receives an average to good loan interest.
In practice, it is more common for prospective borrowers to move very close to these limits. Therefore, it is recommended to explicitly inquire about them. It may be advisable to increase the equity investment by only a few USD in order to break through the next mortgage lending limit and thus benefit from a significantly better interest rate.
At the same time, it is important to ask how the mortgage lending rate is calculated because many banks deduct from the price of the object a safety discount (usually ten percent).
Meaning for our example family
As announced in one of the previous posts, our family comes to a capital requirement of at least 200,000 USD. At the same time, they can use around 25,000 USD, so that they come on a mortgage lending of about 95 to 97 percent (depending on the haircut). Accordingly, not necessarily lure the top conditions, but the financing should be representable at many banks.