Real estate is usually the largest investment made by individuals in their lifetime. In most cases, such an investment can hardly be financed from the spouse’s own funds, so construction financing is used. However, such financing should not only be comprehensively considered, but also concluded with the necessary expertise. That is particularly important, since a construction financing usually runs over a period of 20 to 30 years and must be considered thus over this duration as cost point in the monthly planning. In the following you find tips and tricks approximately around the topic construction financing.
How to calculate the amount of financing?
Who calculates only the costs for the property and the building project, will pile up as a rule clearly too deeply. Because there are a number of ancillary construction costs for the builders, which must also be taken into account. These include all costs during the construction phase and the purchase project starting with the land transfer tax to the notary costs to the costs for the rental toilet of the craftsmen. As a rule, you calculate with ancillary construction costs, which are between 15 and 20 percent of the house price. A financing calculator can provide a quick overview here.
Tips for good construction financing
As a rule, most banks assume that the building owner’s own funds must be sufficient to cover at least the ancillary construction costs. A higher financing, i.e. without available own funds, is granted nevertheless with good professional situation, but often coupled with worse interest conditions. Ideally, your own funds should be sufficient to cover at least the ancillary costs and 10 to 15 percent of the pure construction costs. These 10 to 15 percent of the construction costs are particularly important. If the property has to be sold during the financing period due to unforeseen events, this amount of personal contribution is usually sufficient to be able to exit the financing free of debt. Reputable banks point this out to their customers. Ask your bank or an independent mortgage lender for advice on this and on current conditions!
Tip: Finding the right bank for construction financing
For many people, the first port of call for a construction loan is their own bank. This is also a very good way to first get an initial overview of the possible financing. Who is already for many years customer with the bank, beyond that often very good conditions are offered. However, this does not mean that this financing should be accepted immediately. Because even if the conditions seem good: There are more than enough competitors on the market, which also compete for customers. It is therefore quite possible that the desired construction financing is offered by another bank at much more attractive conditions.
Important tip: For a construction financing, several banks and financing options should be compared with each other to find the best possible financing!
How the monthly amounts are made up?
In the case of construction financing, a precisely defined amount is due each month. This consists on the one hand of the interest and on the other hand of the repayment sum together. The interest is the earnings of the bank on the financing. The repayment amount, on the other hand, is deducted directly from the financed amount and thus significantly reduces the mountain of debt. Once upon a time, a repayment rate of 1 percent was considered good and safe. In today’s era of low interest rates, however, a repayment of one percent is often set far too low.
Monthly installment = interest + repayment
Repayment, unscheduled repayment and variable repayment rates
In principle, the repayment is an enormously important factor. Many banks offer their customers the opportunity to drastically reduce the amount owed by making unscheduled repayments. However, such an unscheduled repayment is often only permitted up to the amount of 5 percent per year. Higher unscheduled repayments can be agreed with the bank, but can worsen the conditions of the construction financing. If you are not expecting a sudden windfall, you should avoid this form of unscheduled repayment.
The situation is different for the repayment rate. This can be quite variable. Many banks allow a change in the repayment rate in a fixed amount for the home loan. This means that a high repayment can be agreed initially, which is significantly reduced in the event of pregnancy, for example. This significantly reduces the monthly installments during this time. If both are employed again, the repayment rate can be raised again.
Interest: The bank’s earnings
The interest also plays an important role. Interest rates can be kept fixed or variable. Fixed interest rates remain unchanged for the duration of the financing or for a contractually agreed period of time. This is offered by many banks, but is often accompanied by a deterioration of the interest rate. Flexible interest rates, on the other hand, are regularly adjusted to the prime rate, but can thus regularly upset the cost of financing.