Those who want to build their own house need the necessary capital to finance it. However, if the private budget is not enough, a building loan can help to finance the house. Kredit-Markt.eu explains the costs of a real estate loan, what they consist of and what you have to pay attention to when concluding a home loan.
What exactly is a construction loan?
A construction loan is basically a loan for the construction of a house. Mostly even an annuity loan. This form of loan is earmarked – this means that the construction money may only be used for new construction, reconstruction and real estate purchases. However, some lenders also provide a construction loan for modernization and the renovation of real estate, often referred to as modernization loan. In general, however, a construction loan is used to build a new house, while the term real estate financing is used more for the purchase of buildings.
Construction loan – what costs do I have to expect?
Anyone who applies for a construction loan must expect a variety of costs that come to him. In addition to the actual loan amount, the borrower has to pay interest. Normally, the repayment is made over a certain number of monthly installments, which consist of a proportional repayment amount and interest. The repayment installment is a fixed part of the loan amount. Depending on the loan provider, the repayment period may vary, so that in some cases quarterly installments or half-yearly installments may be possible.
It is always advisable to compare different construction loans with mortgage calculator before you decide on a particular loan offer. Before that, it is best to get an overview of the total expenditure – with the help of a construction loan calculator, which calculates the installment amount, installment and interest rate for you. In addition, other cost factors such as maturity, fixed interest period, payment flexibility and special repayment options must always be taken into account when comparing construction loans.
You will also have to reckon with one-off costs that are incurred when building loans are completed and vary depending on the lender. Fortunately, no bank may require more closing, account and processing fees for a home loan. However, in the case of construction funds paid in installments, partial payment surcharges may be charged. And provisioning rates are not exactly rare.
Construction loan without equity – is this possible?
Experts advise against financing a home construction through debt alone. For one, not every home builder is granted full financing. In a nutshell: only good earners with enough collateral can benefit from a complete financing for the house. On the other hand, the lending volume grows well in the case of full financing.
In addition, there are correspondingly high interest rates, a longer repayment period and rising rates. Since the risk of the lender in home financing without equity is much higher, this is also reflected in higher interest rates, which in turn increases the interest rate.
In order to build or remodel a property, equity should be available. After all, this is the only way to keep the level of credit and interest rates within certain limits. In principle: 20 percent equity is necessary for a construction loan to be approved! Part of the equity should cover ancillary costs that are normally incurred when building a home.
These include, for example, land transfer tax, brokerage commission, notary fees, court fees and land registration fees. The basis of assessment for these fees is often the amount of the mortgage.
Repayment and interest on construction loan
Most banks and savings banks offer construction loans as classic annuity loans. The amount of monthly installments for the loan thus remains constant – at least as long as the borrowing rate continues. Over the repayment period, however, the interest and redemption amount will change within the monthly installment:
The repayment share is getting bigger and bigger, while the interest part continues to decrease. The background is that already from the beginning a small portion of the loan is repaid. This reduces the residual debt and of course the interest that is incurred. And so it will be amortization portion in the course of the repayment phase getting bigger.
Special repayments also help to reduce the cost of financing the home through a loan. Not only because the debt can be paid off more quickly through unscheduled payments, but also because it saves interest. Even better, you profit disproportionately from saving interest rates through the so-called compound interest effect.
What is better: Short or long fixed interest on construction loans?
Depending on the interest rate, the interest portion of the monthly installments to be paid varies. However, in the case of an annuity loan, a certain interest rate risk due to changed interest rates must always be included. If the first fixed interest rate has expired and the interest rate then increases, the total cost of the loaned construction money also increases. On the other hand, depending on the market situation, interest rates may also fall after expiry of the fixed interest period, so that the total repayment amount is reduced. A long fixed interest rate bond is always preferable to a short one. Unless you want to reimburse most of the construction loan within a few years, and you’re banking on a large repayment installment, then short-term interest rates are an advantage. But it is always profitable to secure a fixed interest rate at low interest rates.
Construction loan terms: 20 to 30 years are quite common
The shorter the term of the construction loan, the faster you are again debt free! As a rule, short loan terms amount to approx. 10 years. The plus here is clearly in the low interest rates. The whole thing is worthwhile only if the monthly installments can be paid long term without any problems.
House builders should, however, also be aware: the longer the repayment term, the higher the total costs, as more interest accumulates through the longer period. The monthly rate is lower and a fixed interest rate can be fixed over a longer period of time. However, even in this case, you should be well-funded enough to cover unexpected costs or bottlenecks without major problems. Longer terms of construction loans usually amount to 20 to 30 years.
Most of the construction loan is not fully paid at the end of the term, a certain residual debt remains. Since very few can not easily settle the remaining repayment amount with a single payment, a follow-up financing is requested.
A follow-up financing is therefore to be understood as the extension of the construction loan after the fixed interest rate has expired. You will receive from your lender a prolongation offer that lists the new terms. Often, the new conditions can be agreed in the follow-up financing, so that, if possible, another repayment rate can be used.