Finding construction financing made easier with these tips
When rents are rising on the one hand and interest rates are falling on the other, it is high time to start thinking about financing the purchase of your own home. But how do you find the right mortgage and what should you look out for when searching for the most attractive mortgage? Here are some important tips.
Which financing model is best?
Anyone dealing with construction financing will encounter different loan models with different requirements. In addition to choosing the right lender, it is primarily important to secure the best possible construction financing. The nominal and effective interest rates are only one criterion. You should take the same care to check a loan offer for flexible terms and conditions and to secure favorable interest rates.
The various types of construction financing
The most popular model among property buyers and home builders is the annuity loan. Despite consistent installments throughout the term of the contract, the repayment amount increases while the interest portion decreases. Banks even grant this type of construction financing as 110 percent financing to borrowers without equity, provided they have the appropriate credit rating and collateral. Two other well-known and classic financing models are the building society loan and the mortgage loan. The former requires a building society contract, which serves as collateral and provides you with equity. Mortgage financing transfers the land register debt to your property and is one of the loans often offered by building societies in conjunction with life insurance. Are you planning a passive house? Then you can take advantage of KfW construction financing with particularly favorable interest rates. KfW grants these promotional loans under certain conditions, one of which is that you use the property yourself. KfW loans are granted regardless of income if all conditions are met and are therefore also an opportunity for builders who have lower incomes or earn their living independently.
What makes a good construction loan
First and foremost, good construction financing has low interest rates. Low monthly installments are also advantageous, even if they result in a longer term. In practice, construction loans with higher installments are more likely to lead to financial bottlenecks than construction loans that are repaid with a lower amount. No one knows what changes life has in store for them 10, 20, or 30 years in advance. Good financing for building a house is therefore flexible. Temporary deferrals of payments, a reduction in payments without additional costs, and annual special repayments on an “optional” basis are advantageous. If you are able to make special repayments, the term is shortened and you pay off the construction loan more quickly. You should also agree on a fixed interest rate for a period of 10 to 15 years. As construction interest rates are currently at a historic low, this contract component will secure you a particularly favorable home loan.
What level of financing do you require?
In the past, 20 to 25 percent equity was required. Today, you can still apply for a construction loan for the remaining amount and get a favorable offer by using your own capital. However, 100 and 110 percent financing is no longer uncommon and is granted by banks under certain conditions. Nevertheless, all ancillary construction costs should be paid from your own budget and not through the construction loan. If you have not saved any equity, consider why you have not been able to do so thus far. Today, loans can be granted quickly and in a variety of ways. To avoid excessive debt and the possible foreclosure of your property, you should realistically assess your financial capabilities and weigh up any difficulties that may arise. The longer the term, the larger the financing amount, and the higher the monthly payments, the greater the risks during the repayment period of your construction loan.
Who actually needs a construction loan?
In principle, financing residential property requires that you have a secure income—ideally a dual income in the family. The requirements increase with the amount you wish to borrow for construction financing. For the construction of small properties under EUR 100,000, you can obtain favorable financing with a short term and adequate repayment rates using your own capital and your own contribution, which is also valued as equity. If you opt for a high-priced modern house with a lot of living space, your liabilities to the bank will increase. A reputable financial and banking advisor will therefore give you a guideline as to the maximum amount of construction financing that would be possible in your case. Any expenses exceeding this amount will result in the loan application being rejected.
Mortgage rates currently at an all-time low
Construction financing is suitable for building a house and purchasing real estate. It is worth weighing up the various financing models and comparing different offers. Take your time to review an offer thoroughly and contact your advisor if you have any questions. Do not take out a construction loan that makes you feel uncomfortable. An experienced bank advisor will calculate “how much house you can afford.” Despite record-low interest rates, the construction loan must suit you and your financial background.
All information has been compiled to the best of our knowledge. However, we cannot accept liability for the details.
