Calculating the Interest Rate – What Borrowers Should Know
Interest rates are at an all-time low, as is the Capital Bank’s base rate. But which factors actually play the decisive role when calculating building rates? And how is the interest rate for mortgage lending composed?
Probably only a few borrowers are aware that the key interest rate of the Capital Bank plays a subordinate role in the calculation of building rates. Rather, the current yield on ten-year Pfandbriefe determines the level of building interest.
Why is the current return also important for private individuals?
The official definition of this form of return is:
The current yield is the average rate of return of all domestic first-class securities with fixed interest rates that are in circulation.
In this context, “initial creditworthiness” means that the legal person who issued the security has an impeccable credit rating. That is why government bonds are primarily used for the current yields. In fact, this is the average interest rate on paper currently in circulation and guaranteed to be paid out. The current yield for Germany is determined by Deutsche Bank. It is based on the remaining terms and issuers.
The published current yield is not only interesting for the calculation of actuarial reserves and thus for companies, but also for private individuals because it provides an assessment of the market level. Borrowers or people who want to invest money should therefore inform themselves about them in order to invest their funds in a safe way.
To find out how much profit you can expect, you should not only get information about the current value, but also get a medium and long-term outlook. In this regard, we recommend using the medium and long-term interest rate charts. To this end, the Bundesbank compiles the corresponding value of the bonds every day and groups them by issuer and by residual term. In this way you get a quick overview of the detailed course of interest rate developments.
How are bonds affected?
Government bonds influence Pfandbriefe and these in turn affect building rates. Government bonds themselves depend on a country’s credit rating. Bonds are an excellent way for the government to raise funds because it borrows from them. Rating agencies such as “Standard and Poor’s” or “Fitch” assess how creditworthy the state is and whether it will be able to repay its debts plus interest in the future. Germany has had top marks for decades and is one of the Triple AAA countries. German bonds are therefore considered to be safe, which affects the supply-demand principle accordingly.
Since Germany has had a good rating for decades, German government bonds are and will remain a safe investment. Which leads to high demand. As a result, the prices of the bonds rise and, in step with them, not only the interest and yields decrease, but also the interest and yields of the Pfandbriefe, which in turn have an impact on mortgage lending rates. If the interest and yields of the Pfandbriefe fall, mortgage lending rates are also falling.
Construction time interest or provision interest
The construction interest of a building loan can be calculated in the best possible way, based on the forecast construction progress. The so-called construction interest is due when the loan has been promised for a new building, but the amount is not required immediately after completion and has therefore not yet been paid out in full.
The buyer of a property concludes a contract with a property developer and, at the same time, construction finance for the required loan amount. In such a case, the individual loan tranches are paid out according to the progress of the construction, since the property developer is only gradually being paid for completed sections of the construction. If the building loan has been promised and provided by the bank, the bank cannot yet charge interest on it. This only happens when the borrower has the loan amount. On the other hand, this means for the institute that it cannot make a profit from the money at this time, since the funds are tied up and cannot be given elsewhere. For this reason, provision or construction interest is calculated, which averages around 0.25 percent per month.
If the borrower knows at what point in time which amount of the loan is to be paid out, he can thus calculate exactly for what period he has to pay which amount of construction interest. Since the construction interest is usually not claimed from the first day the loan is made available, but only from the 31st day of the loan or only after 90 days (in exceptional cases, the lead time is even 360 days), this should be considered as a whole Consider building finance costs.