Value of a property
There are two benchmarks for determining the value of a property. One size is the market value, which is another word for the asking price. Whether the seller actually receives this price is not guaranteed. This value arises from supply and demand in the real estate market and is subject to fluctuations. The other reference is the mortgage lending value. This value is not regulated by the market or set arbitrarily, but is determined according to objective criteria and is much more stable than the market value.
- The determination of the mortgage lending value is a form of real estate valuation.
- In the determination of mortgage lending, a distinction is made between owner-occupied and leased real estate.
- For example, the physical value and usually also the income value of the property must be determined for the calculation.
- The more money needed in relation to the mortgage lending value, the higher the lending rate will be.
- In overheated property markets, there may be a gap between the mortgage lending value and the purchase price, which enormously increases the need for capital.
What is the mortgage lending value?
Mortgage lending value is the value of a property or land that can be achieved in the long term and independent of fluctuations in the value of the market. As a result, the mortgage lending value differs from the market value of a property, which indicates the currently achievable selling price of a property or a property.
Get the sales price of a property
Especially in the current interest rate phase on the market and depending on your personal situation, it may be interesting for you to know what price you can currently achieve on the market for your property. For example, look at ads for similar properties in your area, hire a sworn reviewer, or use online platforms that offer an online rating.
Mortgage lending value of real estate
When determining the mortgage lending value, the financing institutions distinguish between owner-occupied and leased real estate. The mortgage lending value forms the basis for the possible financing volume.
You can determine which differences in the interest level cause different levels of lending expirations with our mortgage lending calculator based on working day updated conditions. Mortgage interest rates will increase by 60 percent if the loan-to-value ratio is increased from 60 to 100 percent, and even the slight increase from 60 to 65 percent will result in a 15 percent rise in interest rates. So for low interest rates, it’s important to raise enough equity.
For example, mortgage lenders may only lend up to 60 per cent of the mortgage lending value of the property to be financed. Commercial banks and savings banks can usually finance up to 80 percent of the mortgage lending value, and building societies as well. The margin for insurance is generally between 40 and 50 percent.
Rarer but not uncommon are riskier financings, where 100 or even 110 percent of the costs incurred can be paid by credit. 110 per cent of financing includes ancillary purchase costs, such as brokerage fees, notary and land register costs, as well as applicable taxes.
Our comparison calculator offers the possibility to try different scenarios:
Compare mortgage lending
Our mortgage calculator helps you to find the best mortgage lending:
Net loan amount: Running time: 5 years ten years 15 years 20 years Mortgage lending: 60% 80% repayment: 1 % 2% 3% 4% 5% 6% 7% 8th % 9% 10% full
How is the mortgage lending value determined?
The basis for determining the mortgage lending value for mortgage banks is the Mortgage Lending Value Determination Ordinance (BelWertV). The application of this Regulation also applies to other institutions, since it leads to the recognition of loans as real loans, which in turn has a more favorable effect on the classification of risks within the meaning of the Solvency Regulation.
For loans up to a volume of 400,000, the following determination requirements apply:
- Simplified valuation
- Execution by a sufficiently qualified employee of the bank.
For higher volume loans, on the other hand, additional conditions apply:
- Detailed valuation report
- Preparation by a sworn expert.
The mortgage lending value consists of two sizes. On the one hand, the real value of the real estate must be determined, on the other hand the income value, ie the future capitalization of the income from the real estate. For self-used one- and two-family houses, however, there is an exception. The material value determination is sufficient for these objects.
If the value of the property falls below the income value of a rented property by more than 20 percent, a review of the sustainability of the income is necessary.
The material value in turn results from the pure land value of the property and the costs for the object itself, the construction value. The floor value is quite easy to determine, it results from the multiplication of the square meter with the square meter price.
Calculation of construction value and land value
In our example, we assume that a young family wants to build a family home. You will find offers for a 800m ² property and a total bill of a developer.
To determine the construction value several positions are used. The price for the converted room per m³ has been taken from the Federal Statistical Office for the year 2015. A sample calculation might look like this:
Calculation of the construction value
As a risk discount, 20 percent were accepted, which are proposed by the IHK. Banks operate at different rates ranging from 10 to 20 percent. Calculate here more carefully and follow the proposal of the IHK.
If your financing partner uses a lower discount than you assumed, this will increase the mortgage lending value and thus your financial flexibility.
Important: The safety discount should not suggest that the construction project may be cheaper. He should ensure the sustainability of the calculations, even if the construction prices should decrease in the future. At least 10 percent must be calculated here according to the legislature (1).
The manufacturing costs result from the building description of the architect. With regard to depreciation, BelWertV provides for a useful life of 80 years for real estate, with an annual depreciation of 1.25%. If the manufacturing cost was 100,000 USD and the property is ten years old, the value is reduced by 12.5 percent to 12,500 USD.
Outdoor facilities usually increase the value of a property and must be taken into account accordingly. For our example, we have assumed six percent or 12,138 USD.
Ultimately, the additional construction costs are added as an increase in value. According to the legislator, these may not exceed five percent. In our example, they may therefore be set at a maximum of 10,115 USD.
Calculation of the land value
For this calculation, we have chosen the average value for the Federal Republic of Germany, as specified by the Fachseite immowelt.de for September 2016. The calculation itself is simple and self-explanatory:
Not quite as simple is the determination of the development costs, since they can not be derived with a rule of thumb. This is mainly because the decisive factor in determining this position is how complex the coupling of the property to the supply network is.
The big keywords are the supply and discharge of water, the supply of electricity, the connection to the road network and the supply of telephone / Internet. The further in the green the property lies, the more material and working hours are needed.
In the next step, the bank and the customer discuss the mortgage lending or capital requirement. If the bank client has sufficient equity available so that he can reduce the mortgage lending limit to 60 percent or even less, he can look forward to the bank’s most favorable interest rates.
In our example, this would be a capital requirement of 179,216 USD or around 180,000 USD. The more capital he needs, the higher the mortgage lending limit will be screwed. This has the following effect:
- The due loan interest will rise
- Lending is becoming increasingly difficult
What effect does a higher mortgage lending limit have?
Between the mortgage lending value and the mortgage lending limit, there is a difference in USD, which represents a financial cushion. In our example, that’s 119,477 USD (289,693 – 179,216). In extreme cases, if the borrower becomes insolvent immediately after the loan has been fully disbursed, the bank has the opportunity to sell the property and go down from the intrinsic value of the house to almost 180,000 USD to meet its claims.
This situation is enormously comfortable for the lender. De facto, he has a negotiating margin of just under 120,000 USD in the utilization of the object. The likelihood of selling the property so that all claims are met is very high.
In other words, the risk of the credit institution for this financing is very low. Therefore, it can also offer a very low interest rate. The interest is not just a kind of rent for the capital, but he also praises the risk of default.
In logical terms this means that the more money needed in relation to the mortgage lending value, the higher the lending rate will be.
The closer the customer approaches the mortgage lending value, the higher the risk for the lender. At some point, the risk is so high that even high lending rates no longer justify lending. The bank then rejects the loan application.
Where this limit is depends on the bank, the applicant, the market environment and the object to be financed. There is no flat-rate limit.
Special case 110 percent financing
The designation of 110-percent comes from the fact that in addition to the pure acquisition costs still further costs for the land register entry and the due land transfer tax incurred. The loan must therefore cover more than 100 percent of the purchase price.
The risk with rising real estate prices
Since banks are not based on the market value of a property, but on the mortgage lending value, it can happen in overheated real estate markets that a gap between the mortgage lending value and the purchase price opens up, which enormously increases the capital requirements.
Ideally, the two values are nearly identical, but potential purchasers should definitely not only pay attention to the purchase price, but also determine the mortgage lending value in advance.
The yield value calculation for leased objects
The determination of the yield as part of the determination of the mortgage lending value for third-party letting is much more complex than the determination of the mortgage lending value for a self-used property.
A sample calculation should clarify the model:
The calculation up to the annual net income is self-explanatory and easy to understand. It gets a bit more complicated at the next step.
What is the capitalization factor?
The capitalization factor is the reciprocal of the capitalization rate. It describes the duration for which an object is good, or which period may be included in the calculation above. It is calculated by dividing 100 by the capitalization rate (100 / 5.6 = 17.86).
What is the capitalization rate?
This value consists of the base interest rate for the simplified capitalized earnings method pursuant to Section 203 (2) BewG, which the Federal Ministry of Finance defines at the beginning of January for the following year. Added to this is the risk premium of 4.5 percent, which is determined as such and includes variables such as entrepreneurial risks, fungibility surcharge, growth discount or owner-dependent factors.
For 2016, the BMF has set the base rate to 1.1 percent. As a result, the capitalization rate is 5.6 percent (1.1 + 4.5). The following list gives an overview of the development of this size:
Sources and further information
1) Federal Ministry of Justice and Consumer Protection – §16 Mortgage Lending Value Determination Ordinance (BelWertV)
2) Federal Ministry of Finance – Basic interest rate for the simplified income capitalization procedure according to § 203 Paragraph 2 BewG
Request a free quotation for individual mortgage lending
As every home loan should be tailored to your needs, we recommend that you consult an expert when planning the financing. Using the form below, you can request a free and non-binding financing consultation and a corresponding offer from Interhyp AG, one of the leading mortgage loan intermediaries in Germany: