A construction loan is a special-purpose loan that is used for building or buying a house. Since these are usually large amounts and the borrower has to pay back over decades, special caution is required when taking out a construction loan. In order to make the dream of your own four walls come true, some questions have to be clarified in advance:
- Equity of at least 20 percent
- exact calculation of all relevant cost items
- Special repayments and adjustment of the installments are important
- Repayment of the loan before the pension
How much equity is there?
In order to be able to finance your dream home, you should have enough savings yourself that the bank can use as security. The rule of thumb here is that the borrower should have 20 percent of the total. The more savings you bring with you, the cheaper the interest conditions will be. The value of the property also plays an important role for the interest rate, because the lower the loan limit, the lower it is. Lending is the value of the property that serves as security for the bank and is pledged in an emergency. Lending is defined on the basis of fixed guidelines, which is normally between 60 and 80 percent.
How much should the loan be?
In order to determine the required amount of the loan, you should get advice, because both a too low and too high a loan have major disadvantages. The borrower – especially if he builds and does not buy – often faces unexpected additional costs, for example due to sudden renovation work. If you calculate too little, it may be necessary to increase the loan. This refinancing can be very expensive.
It is therefore important to assume unexpected costs and to include a buffer for this. This also includes the higher ancillary costs and expenses for renovations that the owner will face. Burdens such as real estate transfer tax and property tax due annually should also be taken into account. In the case of condominiums, for example, administrator fees are also payable.
If, on the other hand, you take out a loan that is too high and repay the money you do not need, a prepayment penalty may apply. This unnecessary risk can easily be avoided by precise planning and calculation.
What amount should you choose for repayment?
Often, one percent of the loan amount is repaid for construction loans, but this value increases over time and is ideally around two percent. However, repayment should always be based on your own financial situation. If you have a lot of money at your disposal, it might be a good idea to agree a higher repayment and get rid of the debt faster.
However, you should not plan the entire income that remains after deducting the cost of living for the repayment. After all, such a long term can easily lead to changes in the living situation and thus to a reduction in the available money. A temporary job search or the birth of children changes the financial situation considerably. It is therefore always a good idea to always reserve a reserve for emergency times.
For the same reason, you should also make sure that the construction finance can have the right amount of flexibility. Special repayments should be agreed upon, which can be either fixed annual payments or irregular amounts. This way you can pay off your debts faster. The rates should also be somewhat flexible upwards and downwards, so that repayment can even be temporarily suspended in an emergency.
Nevertheless, you should have paid off your house at retirement age and take this into account when taking out the loan. In order to be able to better estimate which effective interest rate you should expect and with which term, you should use a credit comparison to find the best offer.
Which fixed interest rate should I choose?
The fixed interest rate for real estate loans is usually up to ten years, depending on the total term. If you have taken out the loan at a low current building rate, you should be committed to it for as long as possible. However, if you speculate that interest rates will fall in the long term, a shorter rate fixation and a subsequent debt rescheduling loan would make more sense. The question of whether it would be better to choose follow-up financing or a full loan depends on the situation of the individual and is best determined in the context of a consultation.