The most important tips for construction financing
Many builders overestimate when calculating construction financing because they forget or underestimate important items. That’s why we have collected the three most important tips for construction financing here. It is not uncommon for prospective home builders to spend a lot of time planning the house, but forget to include the many ancillary construction costs in addition to the construction costs when it comes to financing. To realistically estimate the cost of building a house, do not forget about them. Otherwise, it can lead to great disappointment in the end when the bank finds out that the project is not feasible at all because the monthly installments are beyond the means of a young family.
- How long do I have to pay off and what monthly installment is realistic?
- How high are the interest costs incurred as a result, and is this rate in a realistic ratio to the construction sum?
- What grants might I be eligible for?
- But how do you find the answers?
Because many forget: The installments of a construction loan are often paid off over decades, and interest alone can easily add up to more than 100,000 euros in additional costs. That’s why it’s important to get a realistic picture early on of what financial burden you can expect and whether you can really bear it. After all, you want to build a house and not dig your financial grave.
The easiest way to do this is to follow the three steps we’ve outlined below.
To avoid the latter, ask yourself the following basic questions as you begin planning:
Step 1 Construction financing: Realistically determine the construction costs
Make sure that all costs are really mapped. But what exactly are construction costs? Extras such as a basement or balcony are often not included in the basic configuration of a house, unfortunately, you still have to pay for them. Also, don’t forget about ancillary construction costs. They vary, but budgeting a flat 10% is a good first estimate. You can also find out more about ancillary construction costs in our series of articles on the subject.
If you do not yet own a building plot, you must also include its price in the construction financing calculation – unless you plan to annex a piece of land or settle as a squatter in the city park. Finally, there are also the so-called ancillary purchase costs for the property, which are 5-15% of the purchase price, depending on the federal state. So, for a house that actually costs only 200,000 euros, you easily end up with total costs of around 330,000 euros. That is, to the actual house price you have to add more than 40%. One last tip on overall costs: a house will never be cheaper than planned, but it will often be more expensive, so you’d better factor in another 10-15% buffer to be on the safe side. We have summarized the costs that apply to the purchase of land for you here.
Step 2 Construction financing: Calculate the financing amount
From the total cost, you now subtract how much equity you can and want to raise to finance the house construction.
For example, if you have 70,000 euros that you want to put into the house, the above example results in – 330,000 minus 70,000 euros – so the financing amount is 260,000 euros.
You must now apply for this sum as a loan from the bank. However, they should also plan a small buffer for the financing: Do not put all the equity in the house to the last euro. You never know if unforeseen expenses might come your way. If you then have to apply for an additional loan, it will cost you dearly.
Step 3 Construction financing: Now calculate your financing rate
What does the financing amount now mean translated into monthly installments? The rule of thumb on how to calculate the monthly financing rate is:
Financing amount * 4.5% / 12 = monthly installment
Here we assume that the interest rate of the loan is 2.5%, and the repayment 2%.
In the above example, this results in: 260,000 euros * 4.5% = 11,700 euros annual installment.
11,700 / 12 = 975 euros – this is the monthly installment you now have to pay off over 32 years.
In total, with this financing model, you pay just under 120,000 euros over the years for interest alone (i.e. almost 50% on top of the 260,000 euros), the so-called construction financing costs.
Of course, our example only gives you a rough overview. Every building project is unique and must be thought through individually accordingly. In addition, there are numerous credit models for construction financing. Get comprehensive advice on how exactly to finance your dream home. For example, you can apply for favorable loans from KfW for the construction of energy-efficient houses and thus reduce the interest burden. But you may also be able to apply for other subsidies and grants, such as the Baukindergeld. Then, when it comes to disbursement, it’s all about the finer details: getting the loans disbursed in the right order to make the most of the grace period for home financing.
These intricate details often lead to questions about financing options and loans. Read introductory how to evaluate each financing offer.