For most people, building or buying a home is the largest investment they will ever make in their lifetime. Only a few have the privilege of not having to resort to external financing. You should therefore think in advance not only about the planning and furnishing of your future dream home, but also about its financing, which will probably accompany you for decades. The following tips will help you put your construction financing on a solid foundation:
#1 SET THE FINANCIAL FRAMEWORK CORRECTLY
Before you begin the project of building or buying a home, you should use an honest cash flow to determine your monthly financial resilience. To do this, you need to deduct all personal expenses from your regular monthly income to calculate how much you can spend each month on interest and repayment of a construction loan. In addition to monthly net income, income also includes family allowances and pensions. On the expense side, in addition to the cost of living, expenses for vehicles, hobbies and holidays are recorded. Be honest with yourself at this point and don’t make calculations too rigid. When billing, keep in mind that once you move into your new home, the current base rent charges will no longer apply. There are no additional costs, these are also available in the new home. However, in the new house they are lower.
Depending on the interest and repayment amount, the possible amount of debt financing for your home results from the excess monthly income. With a monthly surplus of €1,800 and an income of 6% for interest and repayment, a financing volume of €360,000 is obtained.
This framework increases the available equity capital. Own funds, for example in the form of bank assets, securities or assets from building savings contracts ready for allocation, are an important pillar of construction financing. Not only do you reduce your financial risk. Lenders also reward their reduced default risk through a higher equity stake with more favorable terms. For a solid construction loan you should be able to cover all additional costs and at least 10%, preferably 20%, of the house price with your own equity. The more resources you use, the better.
With the budget calculator you can quickly calculate, based on calculations of your personal income and expenses and the equity capital used, minus additional costs, what financial framework you have at your disposal for building a house.
#2 BUILD FLEXIBILITY IN REPAYMENT
Some banks only require a minimum repayment of 1% per year of the loan amount for their loans. Given a given monthly income surplus, this pushes you to ask for a larger loan. In our example above, with a monthly surplus of €1,800, the financing limit increases from €360,000 to €432,000 with only 5% income instead of 6% interest and repayment! But such financing would be very risky. First, with mini-repayment, it takes more than 40 years to pay off the loan in full. Secondly, you run the high risk that, given the current historically low interest rate level, once the interest rate lock period expires you will have to pay a monthly installment for a higher interest rate that exceeds your financial possibilities.
At the beginning, with the currently low interest rates, agree on an annual repayment of at least 2% or better 2.5% of the loan amount. This means you have some headroom for financing after the fixed interest rate expires, so you can reduce your repayment if interest rates rise and the monthly rate remains the same.
You gain additional flexibility if you agree with the lending bank the possibility of special repayments during the life of the loan. For example, if you receive a bonus from your employer or a tax refund, you can use these to pay off your construction loan more quickly.
Some loan offers have the problem that the customer is not allowed to change the monthly rate during the fixed interest period. It is best to agree on variable monthly rates. This applies, for example, to young couples starting to build a dual-income house and, a few years after the birth of their first child, one of the spouses wants to reduce their work to part time or not work at all for a while. In this case it would be advantageous if you could simply suspend repayment for a period and thus reduce the monthly payment. So ask about flexible repayment options when you make your financing offer. At many banks this is possible without a (higher) interest rate surcharge.
#3 AVOID INTEREST RATES
The shorter the agreed period for which interest is fixed, the lower the interest rate you will pay. In principle it is therefore advisable to agree on a fixed short-term interest rate if the market rate is high and a long-term interest rate if the interest rate is low. Especially in the current period of low interest rates, it would be risky for builders to choose an interest rate fixation period shorter than 10 years just to save another 0.5% in interest. In the current market situation, a fixed interest rate for 15 or 20 years is preferable, especially if a high initial repayment is not agreed upon. This means that during this period you are protected from an increase in market interest rates.
Conversely, no one should rely on being able to get follow-on financing as cheaply as they are today in 5 or 10 years. However, if the market interest rate increased by 2-3 percentage points from today’s level, which would not be much in historical comparison, the monthly burden would increase by 500 euros or more with a residual debt of 250,000 euros.
Furthermore, the special right of cancellation pursuant to § 489 paragraph 1 n. 2 BGB offers borrowers the opportunity to benefit from falling interest rates even if interest rates have been fixed for a long time. Each mortgage contract can be canceled after a duration of at least 10 years with a notice period of 6 months without paying an early repayment penalty and the remaining debt can be refinanced with a more convenient construction loan.
There is another trap to avoid when it comes to paying interest to the bank. For progress-based installment loans, almost all construction financing providers charge, starting from a certain month, binding interest for the part of the loan that has not yet been used, usually 0.25% per month. For example, the costs for one semester of binding interest for a portion of the loan of 200,000 euros that has not been used amount to 3,000 euros. When submitting your financing offer make sure that binding interest is only charged as late as possible, for example 12 months after loan approval.
#4 COMPARE OFFERS
When looking for the best financing offer, the first step is to contact your bank. No one knows your financial situation better. But if you rely only on your home bank for financing, you could be wasting a lot of money. Comparing conditions is almost always helpful. And because of the long term combined with the high volume of credit, even seemingly small differences in interest rates add up to significant amounts. Even a tenth percent difference in interest rates makes a difference of approximately 3,000 euros on a loan amount of 250,000 euros with a term of 20 years. So, if you pay half a percentage point less in interest by comparing offers, you will save around €15,000 over the lifespan.
On various online platforms you can get a good overview of the conditions that regional and national banks offer on a daily basis and also obtain non-binding alternative offers to those of your home bank.
#5 DON’T FORGET GOVERNMENT FUNDING WHEN FINANCING
For any construction financing, you should check what government loans or grants are available to you. The federal government promotes new construction with low-interest loans through the federally owned Kreditanstalt für Wiederaufbau (KfW).
Many Länder also support families with children, for example with various low-interest or interest-free loans, which banks do not even report in case of doubt because they prefer to sell their loans or are not even aware of them. Your regional construction partner will be happy to inform you about the financing opportunities available to you.
#6 AVOID EXPENSIVE FOLLOW-UP FINANCING
When planning financing for your dream home, many builders forget about the additional costs incurred in building (or purchasing) a home. This does not necessarily have to be property transfer tax, but also includes the costs of connecting the house, external installations, moving house or a new equipped kitchen. If these expenses are not included in the housing budget, costly additional financing is inevitable.
TO However, this cannot happen. With the offer from your regional construction partner you will receive a detailed list and estimate of the additional costs that may be incurred for your construction project.
However, whenever youbuild a home, you should plan a financial buffer for unexpected expenses. These must not affect the house itself. How quickly can an unexpected car repair or broken washing machine happen? In these cases you should keep a safety reserve from your capital, for example three net monthly salaries, and not include it in the house construction budget. This also puts you in a solid position with your construction financing.
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