This is how a construction financing works
Many people dream of owning their own home. But the fewest have the necessary financial resources. Who would like to realize however not only dream, but its desire real estate nevertheless, which needs a basic-solid building financing. However, this must be tailored to the individual needs of the builder-owner. There are many questions to be answered in relation to possible construction financing. We provide answers to the most important ones.
It does not work without own funds
No construction financing can do without own funds. These account for about 20 percent of the total construction costs. These own funds can also consist of personal contributions. For this purpose, it is helpful to have a skilled trade or to have the corresponding skilled workers at your disposal. Realistically seen about 5 to 10 per cent of the own contribution for the construction financing are recognized. As own means also a building saving contract can be brought in, if this is already allotment ripe. It must have reached the minimum balance and the minimum savings period. However, it is not necessary to include the entire amount in the construction financing. It can also be only a part of it.
However, money from one's own assets is also counted as one's own resources. These may include:
- Overnight and fixed-term deposits
- Life insurance paid out
- Private loans from family and friends
- An already existing property
- A property without burdens
- Valuables such as coins, paintings or precious metals
Do not forget the additional costs
Do not neglect the incidental costs when building or buying a property. They account for a share of 10.1 percent of the costs. Often, these costs must be paid from your own funds and may not burden the construction loan. In fact, many banks stipulate that the money provided can only be spent on the property itself. The earmarking of the loan is very tight. Any additional expenses must be paid by the customer himself. The reason is simply that if the borrower were to become insolvent, the bank would not be able to recover the sums for the additional costs, as the security over the property value is missing.
In general, the incidental costs of purchasing real estate are based on the value of the property. The following incidental costs are incurred in the purchase of real estate:
- Costs for the entry in the land register (1.1 percent)
- The land transfer tax (3.5 percent)
- The brokerage fees (maximum 4 percent)
- The setup and settlement fees for the purchase agreement (about 1 to 3 percent).
The total costs can vary however in the height also. If you purchase a property without a real estate agent, for example, these costs are already eliminated. If a lien is registered for the bank, additional costs will be incurred.
Stumbling blocks when purchasing real estate
Who buys or builds a house for himself and his family, can save himself a lot of trouble and stress, if he knows the stumbling blocks. So there is no rude awakening. When buying a property, it is important to inspect the property thoroughly. Generally, every seller is obliged to disclose defects, but it's better not to rely on that. In case of doubt, an expert can be called in for an appraisal. But not only the building substance should be important for a prospective buyer, but also the building plans. Important in this context is whether there are extensions and whether there is a building permit for this.
Building authorities can also subsequently require removal, so no building permit is available. A look at the land register is also a must. Closed agreements remain even if the owner changes. This includes, for example, a residential or right of way. It is advisable to consult an expert when drawing up the purchase contract. In any case, it must be clarified what is to happen if the property cannot be occupied at the specified time.
It would also be interesting to know what happens if circumstances arise that would entitle the buyer to withdraw from the purchase contract or at least reduce the purchase price. In the case of legal and material defects, the question of liability must be clarified. Guarantees and warranty claims from the companies that built or repaired the property have to be transferred. Especially with prefabricated houses, some manufacturers usually give guarantees of 30 years on the basic construction.
Cost traps when building a house
The dream of the own home bursts fast, if one calculates only once wrongly. Cost traps in house building can so quickly lead to financial ruin. Thus also already in the construction financing and in the purchase of land some cost traps are hidden. Who has a construction financing with low interest in the pocket, is pleased. But this is often too early to rejoice, after all, after the expiry of the fixed interest rate, the building loan is usually not yet paid off. In the subsequent financing, the costs then explode because the interest rate may have risen in the meantime. Therefore, one should consider in advance to reduce this risk with a long interest rate fixation. The repayment rate must also be at affordable levels.
But the financing itself also contains pitfalls. Construction projects often become significantly more expensive than originally planned. Therefore, it is advisable to have a financial buffer. In the other case, builders must ask the financing bank for additional financing, which can be expensive. In general, for construction financing, it is advisable to opt for a long term in relation to the fixed interest rate, whereby the loan amount must be calculated generously. Especially today it is important to benefit from the low interest rates for as long as possible.
To save on rent, builders often want to move into their new home as quickly as possible. That is why completion should be fast. That leads to time pressure and that again to a defective building execution. Damage and delays are the result. Further financial burdens arise. In this context, it is advisable to work with independent building experts. This costs money at first, but the investment is worth it, as you can save yourself additional costs due to botched construction work.
But not only the actual construction of the house can cause additional costs. The design of the exterior, for example, can also swallow up vast sums of money. Who does not want to arrange this area alone, which must count on 40 to 100 euro per square meter. In addition, the construction of a terrace and the driveways, if they are to be paved, have to be considered. There is also not for free.
Interest rate – more favorable than ever
The loan interest rates offered by the banks and fixed in the contracts are based on the fixed key interest rate. The banks lend each other money at this key interest rate. As a consequence, it has a great influence on the amount of the loan installments to be paid. The amount of the loan interest depends on different factors:
- Fixed or variable interest rate
- Of the required loan amount
- The loan term
- The interest rate.
Effective interest rate versus debit interest rate
The nominal calculation basis for the repayment of the construction financing is the debit interest rate. The effective interest rate is higher than the debit interest rate because it includes fees, charges and credit costs. Currently, the percentage for loan interest is very low if you choose a variable interest rate.
The choice between variable and fixed interest rates
The interest rate in particular has an important influence on the amount of the installments. With fixed interest, the interest rate is fixed once for the entire term of the loan. Even if the interest rate decreases or increases, the interest rate always remains the same.
With the variable interest rate, the interest rate is adjusted at fixed intervals. If the interest rate level falls, you benefit from more favorable interest rates. But if it goes up, so do the interest rates on the loans. With variable interest rates, the interest rate is calculated from the reference interest rate, such as EURIBOR, and the interest margin.
The interest margin is a markup charged by the lending bank. It is possible with a variable interest rate that an interest rate cap can be secured with an interest rate cap over a certain period of time. Hedging can be done through a building society loan or other special loans from banks. This is always recommended if a large increase in interest rates is to be expected.
The EURIBOR as a basis
The most commonly used reference interest rate is EURIBOR. It is the basis for the amount of interest on the loan. This is the interest rate at which european banks are willing to lend money to each other. EURIBOR can vary because it depends on how long banks lend each other the money.
This can be for periods of between three, six or twelve months. The EURIBOR is calculated on a daily basis. EURIBOR has been trending downward since the beginning of 2012. At this time, the european central bank lowered the key interest rate to zero. In the meantime, the EURIBOR has even reached negative territory. For construction financing, this means that loan rates are currently very favorable. Banks are obliged to pass on this negative interest rate to customers.