Ways of financing the purchase of a property

Most property buyers do not have financial resources large enough to complete the purchase in full. As a buyer, you must analyse the state of your finances and choose the most advantageous way of repaying your obligations. Remember, however, that when you ask friends for a loan or apply for a bank loan, you must adopt a realistic repayment plan! Do not try to borrow more than you will be able to repay. Such conduct leads to disaster, that is, insolvency.

How to finance the purchase of a property

Own funds – cash. How can you obtain part or all of the funds for buying your dream home? Here are the options:

Selling land or plots, a car, a collection of paintings, coins and so on

Regular saving

A bank deposit

State Treasury bonds

Investing on the stock exchange

Buying a cheaper property, e.g. in Dąbrowa Górnicza, renovating it and selling it at a profit

Renting out a flat

The ability to earn and save is the key element of success at this point.

Borrowed funds – a loan or credit. How can you obtain part or all of the funds for buying your dream home? Here are the options:

A loan from friends and family – if you borrow from a friend or family member, you may get better interest rates and more favourable repayment terms. Be sure to sign an agreement stating the amount borrowed, any interest, the size of the instalments and their frequency – the exact dates.

A mortgage from a bank – first look at the offers of many banks. Apply for a loan at several banks, which will increase your chances of getting one. Get help from a financial adviser. Remember that banks will examine the state of your finances closely before deciding whether to grant a loan. Choose the currency of the loan carefully; it is easier to get a loan in PLN if you are applying without a deposit (down payment). Also consider the possibility of taking out a loan in a foreign currency, just analyse the possible exchange-rate fluctuations. It is the most popular way of obtaining funds for a purchase.

A typical foreign-currency loan – it is granted in the domestic currency, but at the moment the agreement is signed its value is converted into a foreign currency. The instalments are stated in the foreign currency, and repayment is made in the domestic currency at the rate on the given repayment day. It is most advantageous to repay the loan at the average rate.

A denominated foreign-currency loan – the loan agreement specifies the amount of the loan taken out in a foreign currency, e.g. euro. The bank converts the loan tranches into PLN at the current rate on the day of payout. If the rate on the day of payout is lower than at the time the credit decision was issued, the loan amount in PLN will also be lower than the amount the client applied for. Choose a loan offer with the longest possible repayment term, because of the lower instalments and greater creditworthiness. There is nothing to stop you repaying such a loan early. Everything depends on the state of your finances. Remember to choose equal instalments; they are lower than decreasing instalments for about 1/3 of the loan period, but be aware that the equal-instalment system generates more interest than decreasing instalments. You can put the difference between them into a savings account or an investment fund.

READ ALSO – A MORTGAGE FOR PEOPLE IN DEBT

Other forms of financing a purchase:

A mortgage-secured loan – a variety of loan secured on a property you own. The amount you can apply for is considerably higher than with a traditional bank loan, up to 80% of the value of the property, though sometimes it reaches as much as 100%. Another advantage of a mortgage-secured loan is the long repayment periods (even 30 years) and the low interest rate. You can use a mortgage-secured loan for any purpose and, as with a loan, repay it in any currency. If the bank decides that you are insolvent – because you fall behind with your instalments – it may decide to enforce against the property.

Property leasing – this type of investment is a form in which one entity makes a property available to another party. The second entity, called the lessee, pays lease instalments to the lessor. When the lease agreement comes to an end, the property can be bought out. Leases may cover so-called commercial properties, that is, office premises and retail and service buildings. Leasing can be used by companies, partnerships and entities running a business. Companies that buy a given property may make it available to other entities. Property leasing is currently a popular alternative to bank loans; you can choose the currency of the lease, the repayment terms and the instalments individually. People who do not run a business can use consumer, that is, private, leasing. The properties covered by lease agreements most often fall into the following groups: commercial properties, investment properties and non-residential properties.

READ ALSO – WHAT ARE THE CONSEQUENCES OF NOT REPAYING A MORTGAGE?

Types of security for bank loans:

Basic:

• security in the form of a mortgage
• power of attorney to dispose of the borrower's account
• assignment to the bank of rights under the borrower's life insurance policy
• security in rem in the form of part of the debtor's or a third party's assets
• assignment to the bank of rights under the insurance contract against fire and other unforeseen events

Interim:

• insurance of loan repayment with an insurance company until the mortgage is entered in the register
• assignment of receivables from contributions paid towards the construction of the property by a substitute investor

Additional, where the bank considers the basic security for the mortgage insufficient:

• a surety under civil law
• a surety from third parties
• a cash deposit in a separate bank account
• a mortgage on another residential or commercial property
• assignment of rights from participation units in investment funds

Do not be caught out; pay particular attention to:

• the interest rate
• currency exchange rates and their fluctuations
• the commission charged by the bank
• the costs of loan insurance – increasingly common, as it provides an additional safeguard in case the borrower becomes insolvent

Choose the most convenient form of financing the purchase of a property!