Construction financing tips at a glance
Construction financing is a complicated, but also particularly important topic for prospective builders. Above all, a suitable financing concept must ensure that the construction interest rate can be serviced comfortably over the entire term of the loan. Among the many aggressively advertised loan offers for home financing, however, it is often overlooked that a not insignificant portion of construction financing comes from other sources.
The credit models for construction financing:
The annuity loan, also called a mortgage loan, is the most common. It consists of fixed monthly installments that have a term of between five and fifteen years. The monthly charge is fixed for a precisely defined period of time. The rate remains the same until the fixed interest rate expires. This type of loan ensures good planning security. The installment payments consist of: the repayment of the loan and the interest accrued on the loan. It should be noted that the level of interest rates remains at the contractually fixed level over the fixed interest rate period – it is then not possible to benefit from general interest rate reductions, but interest rate increases are also excluded.
The amount of repayment, known as the repayment rate, is a matter of negotiation and can be designed to meet the needs of the builder. In some cases, unscheduled repayments are also possible, with these the loan amount can be reduced by making special payments off schedule – thus reducing the term of the loan and saving interest. If the loan is to be paid off in full ahead of schedule and it is thus to be terminated prematurely, the lender is entitled to the so-called prepayment penalty. This is compensation for the loss of profit from interest income. Cancellations of loans often occur when real estate is to be sold. The bank can also refuse such terminations if there is no important reason (such as the sale of the property).
Full repayment loan
The full amortization loan is a variant of the annuity loan that incurs lower costs for interest. The term of this loan is short (up to 30 months) and the repayment rates are comparatively high. This option is therefore only suitable for builders with a high income. Also, unscheduled repayments or repayment breaks are usually not possible – so there is less flexibility than with an annuity loan. On the other hand, the full repayment loan ensures planning security, because the installments are guaranteed to remain the same and the term is also precisely determined.
Building society loan
In the case of a building society loan, the lender is the building society. It is granted as a result of a building savings contract. These are long-term loans tied to real estate financing (house construction, purchase, modernization). A minimum savings amount must be made in order to be entitled to the building savings amount (savings balance and loan amount). Read here to find out whether building savings is worthwhile.
A variant of the building society loan: the constant loan
The constant loan is a building society loan, but it does not have to be saved in advance. The loan is disbursed immediately, no repayment installments are paid, only interest installments. Instead of repayment installments, payments are made into a building savings contract. Planning certainty ensures that the monthly charge remains the same over the entire term. There is also flexibility, as the loan can also be repaid immediately with unscheduled repayments. In addition, subsidies can be obtained in the form of the housing construction premium.
Full financing: financing without equity capital
So-called full financing (financing without equity), are risky and expensive. A very high interest rate can be expected here. In addition, the maturity is high because no equity was contributed. Also, large debts can be expected in the event of insolvency. Therefore, this model is not recommended. As already mentioned at the beginning, at least 20% equity capital should be brought along; ultimately, the more the better.
The (KfW) – Kreditanstalt für ^Wiederaufbau grants development loans, for example, for ecological construction. However, the specified standards must be met for this. In return, builders receive extremely favorable loans. Since many of the measures not only benefit the environment but also reduce future operating costs, meeting the standards and receiving a KfW grant can be especially rewarding. Because you pay less interest on the loan amount and save money in the future as well.
Building with subsidies from the state
Everyone is talking about the “Baukindergeld” subsidy as a legislative project of the current government, which may be passed this year. But even those without children can benefit from numerous subsidy programs for home construction. For example, building as a retirement provision is supported with the Wohn-Riester subsidy. However, this only subsidizes owner-occupied housing. The residential Riester subsidy is therefore not suitable as an investment for subsequent sale or renting. But even those who want to refinance part of the construction costs by renting can benefit from state subsidies. For example, there is generally a tax break for the construction of granny apartments, but in some municipalities there are also subsidies to encourage the creation of housing. Other communities, however, specifically promote solar installations. As a result, the initial costs for building owners are sometimes so low that the systems pay for themselves in just a few years instead of in the distant future.
Collateral for lenders and contractors
Lenders require collateral. Entries in the land register (land charge), for example, are a common practice here.
It should also be noted that there are different contractor billing methods: via partial payments (progress payments) or via the full amount upon completion. Full advance payments should never be made, because in practice there is a not inconsiderable risk of insolvency of the contractor. The payment method also affects how high the contractor’s collateral requirement may be. At the beginning of 2018, there are a number of new regulations in this regard, which are summarized in the so-called consumer construction contract.
Collateral for the contractor can be: Guarantee of a bank, credit insurance, security mortgages, deposit of funds or securities, guarantees by third parties.
Home financing advice
Putting together the right combination of loan model, subsidies and construction company is a recurring topic in our advice to builders, because consumers often find it difficult to compare and evaluate terms and conditions. Or they simply don’t know the alternatives and funding options. Evaluating financing offers, also with regard to the personal situation and one’s own priorities, is only one aspect of this. If, for example, you decide to meet KfW standards in order to receive a subsidized loan, you must of course also take into account in your search for a construction company that the construction company offers corresponding services or that the prefabricated house model you decide on also has corresponding equipment options.
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