Especially because of the low interest rates in the construction loans sector, many consumers are currently buying real estate and, as a result, are financing mortgages, although there may not always be a lot of equity.
If, however, the monthly rate is still good, it is not a problem, if a mortgage is implemented, although only 10% own capital is available.
However, due to the fact that many borrowers can not include sufficient equity in the financing, the construction loans that exceed a certain limit are classified. In this context, the respective credit facility is defined by the lending institution and is generally equal to 60% of the total funding requirement for the property as a credit limit.
What About The 60 Per Cent Mark?
60 percent brand the mentioned 60% have in the field of construction financing a very special reason. Most banks use this namely 60 percent mark as lending limit for a first priority mortgage rates Winnipeg on.
Specifically, this means that the value of the property to be financed is determined, for example, at € 200,000. Now, however, the customer does not immediately receive a credit for this sum, but rather the bank draws a risk margin. If, for example, the real estate would have to be forcibly foreclosed because of the liquidity problems of the borrower, it is unlikely that the current market value will actually be reached.
For this reason, the banks do not set the loan value at 100%, ie in the example case at 200,000 dollar, but for example only 60%, ie 120,000 dollar. This amount of more than 120,000 dollar can, however, be awarded as a very favorable first-rate loan, which is collateralized with a prime mortgage or mortgage.
This senior collateral is also known as “1a-mortgage”. This designation initially contains the rank in the land register. Such a mortgage is a security which is registered first in the land register, ie, a first-rate mortgage or land charge.
What Is 1b Mortgage?
1b mortgage In addition to the primary mortgage or mortgage guarantee, which can be used to hedge a first mortgage loan up to 60% of the value of the loan as collateral, there is, of course, the remaining financing requirement, which must also be covered by a real estate loan.
This loan is a construction loan, which is intended to close the gap between the entire financing requirement and the 60% brand mentioned.
This credit cannot by means of a course first mortgage are hedged as those ranges only up to a collateral value of 60%. As a result, the so-called 1b mortgage covers the remaining part of the financing requirement, which in practice can usually amount to up to 80 percent of the loan value.
Some banks go as far as 90 or 95 percent of the loan value, so that in these cases, a full financing is almost the same.
Subordinated Security For The Building Mortgage Loan
The subordinated collateral does not only play a part in real estate financing, which is carried out by means of an annuity loan, but variants 1a and 1b are also important in the field of building mortgage loans. In the case of the building mortgage loan, the amount of repayment is fixed from the outset and real estate financing is almost always based on a subordinated security.
It is usually the case that the borrower carries out most of the real estate financing with a mortgage loan, while a smaller part is financed by the building society loan. Because of this fact, the primary security is almost always provided by the bank as a lender, while the building society is satisfied with a subordinated basic debt.
Does Subordinate Security Affect Conditions?
In principle, the customer has a lot of advantages with a loan from the building society, such as the fixed repayment and the elimination of the interest rate risk. Furthermore, the customer does not have to fear that the subordinate security would have a negative effect on the conditions.
Instead, it is often even the case that the interest rates even lower than the credit the Bank, which is involved in the real estate finance at senior mortgage are.
Subordinated Mortgage Security
This point is certainly a reason for the fact that the building loan is now partly included in the financing of the property by a large number of borrowers.
Are There Differences In Terms?
The distinction between the two types of mortgages, however, does not only relate to the rank of the collateral, but has a tangible impact on the borrower in practice.
Indeed, there are sometimes significant differences with regard to the interest rates at a 1a-mortgage compared to a 1b-mortgage.
For the banks it is, of course, the case that the granting of loans up to 80 per cent of the market value is associated with a higher risk than if only 60 per cent of the market value has to be financed.
On this basis, it is understood that the bank for a mortgage 1b a higher interest rate in mortgage lending for the corresponding loan is calculated , as is the case with the credit portion which is secured by the mortgage 1a. Depending on the bank, the borrower can assume that the difference is between 0.3 and 0.9 percentage points.
For this reason, borrowers should always try to bring as much equity as possible into the financing, so that a 1b-mortgage is no longer necessary in the ideal case.
In any case, however, it should be avoided that there is still further capital requirements beyond the real estate lending section, which is hedged through the 1b mortgage. If more than 80 or 90 percent of the required sum has to be leveraged, this loan is again significantly more expensive.