The right mortgage for you.

If you want to finance your dream property, you will usually need a mortgage. Your own capital is often only enough to cover part of the costs of the construction or purchase. In this case, the remaining capital is borrowed on finance from a bank, insurance company, pension fund or institutional investor in the form of a loan. The lender gets right of lien on the property being financed to secure the loan. In common parlance, this is known as a mortgage. The technical term is mortgage loan.

Generally speaking, owner-occupied homes are financed by a deposit of at least 20 per cent and a maximum of 80 per cent borrowed capital. The borrowed capital is divided into two parts: Depending on the lender, the first mortgage is granted to cover up to 65 to 70 per cent of the value of the property. The remaining 10 to 15 per cent is covered by the second mortgage. If, when financing a property, the proportion of borrowed capital is below 65 per cent, only the first mortgage will be taken out and the second will be superfluous. Unlike the first mortgage, the second mortgage must be repaid (also known as amortised) within 15 years or by retirement at the latest.

Affordability means the ratio of the property’s ongoing costs to the mortgage borrower’s income. The costs of financing include interest payments and the agreed amortisation amount for the mortgage, as well as maintenance and incidental costs for the property. As a rule of thumb, the ongoing costs for the property should not exceed one third of the mortgage borrower’s gross income.

In addition to affordability, the loan-to-value ratio is also one of the key criteria for securing a mortgage. The loan-to-value ratio indicates the ratio between the amount of the mortgage (borrowed capital) and the value of the property. Normally, the loan-to-value ratio must not exceed 80 per cent. This means at least 20 per cent of the value of the property must be financed by the deposit.

Amortisation means paying the mortgage loan back to the mortgage lender. Often only part of the entire mortgage amount is paid back, i.e. amortised. Depending on the loan-to-value ratio, the mortgage must be amortised over 15 years or by retirement at the latest. Voluntary repayments can also be agreed however, in order to reduce the mortgage amount during the period of ownership. Most mortgage borrowers do not amortise the mortgage in full in order to take advantage of tax privileges.

When a mortgage is taken out, the mortgage borrower owes the mortgage lender interest. Depending on the model of mortgage, this amount may be fixed or vary over time. Repayments may also be due to reduce the amount of the mortgage over time.

It is often only possible to finance a new home after selling your current property because the required deposit is tied up in the property being sold. A potential solution to this is to take out bridge financing, also known as a bridging loan. Bridge financing means you can own two properties at once for a certain period of time.