The phone rings and at the other end a financial advisor calls for the third time today, wanting to know whether you have made a decision on one of his financing offers. After you have spoken to various banks and consultants and have created offers tailored to your individual needs, it is now time to get serious: The offers are on the table and you have to make your choice. But the decision is anything but easy: At first glance, every offer looks like the next.
Compare financing offers
It is often difficult for laypersons to identify which financing plan is best suited for their own project. Even if no one can make the final decision for an offer for you – this article will show you the following three steps, which criteria you should use to make your decision.
Building savings contract or building loan
A distinction must be made between mortgage lending through a home savings contract with a home savings loan on the one hand and a home loan on the other. In the case of a home loan and savings contract, future builders initially pay money to a building society for a multi-year savings phase, which credits them with interest. In addition, the builders are entitled to a subsequent low-interest loan with a fixed interest rate. In order to complete the savings phase, builders must have saved around 40-50% of the agreed building savings sum. When it comes to building a house, they are paid the entire savings amount and the rest is paid off as a loan.
A major disadvantage of the home savings contract is the poor interest rate during the savings phase. On the other hand, builders can also rely on low and fixed interest rates to be paid during the loan repayment phase.
The other alternative is a construction loan, in which the monthly repayment installment is lower, the more equity the builders have available. In any case, the proportion of equity for the planned construction project should not be less than 20-30%, otherwise smooth construction financing is at risk. If the conditions of a home savings contract do not seem profitable enough for you, you could first save up the necessary equity on your own in order to then look for the right loan.
Interest rate, repayment, fixed interest rate and loan term – what do the terms stand for?
Interest rate, repayment, fixed interest rate and loan term are the four most important terms for comparing financing offers. The monthly installment to be paid for your construction loan consists of the repayment amount, i.e. the repayment of the borrowed money, and additional interest. Builder-owners agree a fixed interest rate with their bank, i.e. a period in which the agreed monthly interest payments cannot vary. Since the loan term for a construction loan usually lasts longer than the fixed interest rate, a new interest rate must then be agreed for the next fixed-interest term. In the case of construction financing with a savings contract, the interest rate is fixed over the entire term of the financing, which gives builders additional security.
If you opt for a long fixed interest rate, i.e. a long term of the fixed interest rate, you can plan your financial situation for the coming years and also benefit from a favorable fixed interest rate for a long time in times of particularly low interest rates. On the other hand, builders save interest if they can pay off their loan as quickly as possible and therefore choose a short loan term from the outset. However, should unexpected costs arise, secure construction financing could be jeopardized and the new fixed interest rate could be raised for follow-up financing. So only opt for a short loan term if you have a financial cushion.
Total construction costs and special payments
The final criterion for comparing the offers is the absolute total costs, which are made up of the interest and the fees incurred, such as one-off additional costs for financing or commitment interest. Every bank is obliged to indicate this accordingly in its offer. It is important not to rely on the effective interest rate in this comparison. Although this includes the costs, the picture is distorted by the different terms of the financing. The absolute total costs, on the other hand, include the term. The comparison of the total costs of the individual financing offers shows how much you actually have to pay. But even with this apparently objective comparison, it is important not to lose sight of the essential aspect of the running time. The total costs for a 10-year fixed interest rate are of course initially lower than for a 20-year fixed interest rate. But with the second option you also have longer security and less interest rate risk.
In order to further reduce the total cost of a loan, builders should also pay attention to the possibility of making special payments before signing the contract. With most construction loans, 5% of the loan amount may be repaid unscheduled. So if you unexpectedly have more money available or have saved a lot, you can pay off the loan earlier than agreed and thus save interest.
The decision for a financing offer
In order to be able to make a sensible decision, you must first be clear about what is important to you when it comes to financing. Only then can you check the offers that come into question with regard to the key points and select the best offer based on the absolute total costs. The important thing is that you allow yourself enough time for the decision-making process, but don’t prolong it unnecessarily. If you heed the three steps, nothing stands in the way of the decision.