Strategies against rising building interest rates
The historically low interest rate phase is over. Already in the last months surprisingly strongly rising building interest rates could be determined. Currently, the increases are still moderate at around 3 percent in a decade comparison. But in the long term, even slowly rising construction interest rates can lead to a noticeable additional burden on borrowers. It should not be forgotten that the very cheap construction money made it possible for many people to buy real estate in the first place, despite high real estate prices.
The current development on the interest rate market seems to be slowly coming to rest: the interest rates for an average construction financing with a ten-year term have risen to over three percent. This is comparable to the interest rate level around 2010. Now that the ECB has raised the key interest rate, construction interest rates are trending towards 4 percent. Experts believe that interest rates will tend to move sideways at this level until the end of the year.
The problem of rising construction interest rates
It is obvious that rising interest rates have a major impact on the purchase decision: the historically low interest rates of the recent past cushioned price increases in the real estate market. If one must finance now high real estate prices with higher interest rates, this means that one should have far more own capital funds around surely finance and the monthly loads in borders to hold to be able.
But: currently no one can predict the actual interest rate development. Too many imponderables due to rising inflation, effects of the pandemic and government interest rate policy do not allow a reliable prediction to be made. But it seems certain that you should not continue to hope for a falling interest rate level. There the experts are sure. Sideways or moderately upward – these are the forecasts of the banks for the near future.
That means, who already a purchase real estate found or shortly the conclusion of a new building beauftagung stands, should act now. Since many banks grant an interest-free lead time of up to one year until the disbursement of the construction loan, a construction financing should be concluded at the latest at the beginning of next year at the currently still favorable interest rates. But before this signature is a comprehensive consultation – preferably by a bank-independent – construction financing expert recommended. In the focus thereby: the commitment interest.
Important in the case of "early" financing: the commitment interest
Many banks offer an interest free period of one year. This is a good way to "work" from the borrower's point of view. However, these also entail a major risk. Because these calculate themselves always on the very last bank-side disbursement amount of the total loan. And particularly with new buildings or complete reorganizations a provision interest-free time of one year can be very scarce. What if building materials are delivered late, trades are not completed within the agreed timeframe or other delays extend the payment of the last loan installment backwards?
On average, banks charge 3 percent commitment interest after expiration of the term. This is much. These commitment interest resp. The broadstellungsfreien period must be considered with an early financing thus not only, but also negotiated.
Strategies for follow-up financing
From today's perspective, anyone who took out a long-term construction financing in the period 2012 to 2015 at the significantly more expensive interest rate conditions at the time has 3 options:
Of the current contract with the help of the special right of termination after 10 years
- Conclusion of a follow-up financing with a 12 to 16 month free lead time
- Use of a forward loan, which will not be used for 16 to 32 months
With a forward loan, you can secure the currently applicable interest rates for the future. This is of course a bet on rising interest rates. But it could put many borrowers before financial challenges, if with the expiration of the debit interest connection after often ten or 15 years its follow-up financing at clearly higher interest must be locked. Especially if the income allows only a low repayment. It is not for nothing that consumer advocates recommend calculating before taking out a loan whether the financing is still feasible for the borrower with interest rates of 5 or 6 percent with the follow-up financing.
Is a forward loan worthwhile if rising construction interest rates are expected??
Therefore a comparison with a forward loan is appropriate. Currently, one should expect an interest rate premium of approx. 0.02 percent per advance month with a forward loan calculate. This means that a forward loan with a 24 month lead time increases the interest rate by approx. 1 percent. Does the construction interest rate in 2 years actually stand at ca. 5 percent, a forward loan is a lucrative deal.
Follow-up financing using the free lead time
This option usually makes a provider change necessary. If the initial financing expires in 12 to 16 months, then you can already secure the follow-up financing at the currently valid construction interest rates. Prerequisite is to find a bank that offers a corresponding free lead time. Bank-independent mortgage brokers, who are informed about the offers of more than 400 financing banks, are predestined for this purpose.
Use special right of cancellation
The legislator grants all borrowers the possibility to cancel even a longer-term financing after exactly 10 years with a 6-month lead time. This option is thus available to anyone who took out a longer-term construction loan between 2013 and 2014. Again, it is advisable to seek free advice from a knowledgeable construction finance broker. In the best case you can secure such a follow-up financing already one year in advance at the current interest rate without incurring any costs.
Rising construction interest rates are a danger for full- or. 110 percent financing
From a 110 percent or. Full financing one speaks, if the bank granted the complete purchase price and purchase additional expenses as loan. In this case, the loan amount often exceeds the so-called mortgage lending value of the property. By financing completely, the bank takes a big risk – and makes it pay with much higher interest rates.
Rising construction interest rates in the future can be dangerous for full financiers. If the loan-to-value ratio falls below the residual debt, there is a threat of further surcharges on the already increased interest rates because of the risks involved. This can make the installment for follow-up financing unaffordable. Just 100 percent or. Full financiers should therefore think about how you in times of still favorable interest rates an affordable follow-up financing in "dry cloths" to get. Here, too, a free consultation on the possibilities of secure follow-up financing is advisable.
Rising construction interest rates – a thoroughly realistic scenario
There are currently some indications that interest rates will rise in the future. That's why it's advisable – for both first-time and follow-up financiers – to start thinking now about what strategies to use to counter rising construction interest rates. Since no further sudden increase is to be expected, one can decide and act then fast on basis of the own strategy. In this case: good advice is not expensive. Because the accedo AG advises you in these questions fully, but free of charge.
Interest rates are rising again. The question arises whether a rescheduling of the current contract or a forward loan makes sense in individual cases. Take advantage of the free advice from accedo AG.