Overview of various construction loans
The financing of the home must be before the start of construction. Construction financing is the combination of the various types of financing to cover the capital requirements when financing a property.
This includes the purchase of a new building from a property developer, an own building project, the purchase of an existing property or renovation and modernization of an existing property.
The property can be used for own living purposes or for rent
The following explanations mainly relate to owner-occupied residential property.
In addition to equity, there are the following forms of debt financing:
- Bank loans
- Building loans
In the case of a home, residential Riester can also be included in the financing.
Requests for building money from banks can also concern follow-up financing and debt restructuring.
As much equity as possible
For solid construction finance, it makes sense to use equity capital of at least ten to 20 percent of the total costs. The higher the equity component, the better. Equity includes credits, building savings, existing land and own work that is brought into the property.
The classic bank loan as a major component of financing
The bank loan for a property is usually an annuity loan, which is repaid with monthly installments of the same amount. The installments consist of interest and repayment. The initial repayment usually amounts to one to three percent of the loan amount. As the repayment increases, the interest is reduced and the repayment portion increases because the loan rate remains the same.
In some cases, there are also repayment loans (annually falling installments due to reduced interest, the repayment remains the same) or final loans (repayment at the end, the cession of life insurance or similar).
In addition to conventional banks, direct banks also offer corresponding mortgage offers on the Internet. These providers can often offer favorable conditions for building money and do not have to shy away from the comparison to local branch banks.
Land charge serves as security for the loan
The bank uses a land charge as security for the loan, which is entered in the land register in its favor. The declaration of agreement between the lender and the owner of the property, the amount and registration of the land charge, must be submitted to a notary and certified.
The application for registration with the land registry can then be made. The property owner incurs costs for the notary and the land registry. The loan amount is usually only paid out after the land charge has been entered in the land register.
Should the case arise that the installments for the loan can no longer be paid, the bank has the right to auction the property in order to offset the loan with the proceeds.
Interest rate depending on the financing rate
When a loan request is made, the bank determines the mortgage lending value for the property in question. For up to 60 percent of this, the borrower receives a certain interest rate. If the total bank loan amounts to a higher amount, for example up to 80 percent of the mortgage lending value, the higher loan interest is payable for the difference (from 60 to 80 percent). In some cases, banks also charge the increased interest for the entire amount.
The interest rate on a bank loan for real estate financing is usually fixed for a few years, for example for ten years. Especially in periods of low interest rates, choosing the longest possible fixed interest rate, for example, 15 or 20 years, makes a lot of sense. Repayment is also possible with longer commitments after ten years. Depending on the length of the fixed interest period, the bank’s interest rates are staggered: with longer fixed interest rates, the interest rate increases.
Effective interest includes all costs
The effective interest rate is generally somewhat higher than the nominal interest rate. This is because all the costs associated with the loan must be included in it. These include, for example, processing fees and agency commissions. The payment method for the installments also has an impact on the effective interest rate.
A monthly or quarterly payment in installments increases the interest compared to the nominal interest, which is calculated on a year. The effective interest rate is, therefore, the interest actually payable on the loan. For a comparison of loan offers, the effective interest rate serves as a comparison criterion and not the nominal interest rate. The effective annual interest rate in the loan agreement is required by law.
Payment for new construction based on progress
In the case of a new building, the loan is paid in installments, depending on the construction progress. Provision interest may be payable for the amount not yet used. Most of the time, however, the calculation of this interest only begins after a few months. If the loan amount requested at the beginning is not sufficient to cover the entire costs, additional financing may be necessary.