Many roads lead to home ownership – and most of them go through the bank. After all, very few real estate buyers find themselves in the comfortable situation of being able to make such an investment with their own financial resources alone. With a loan, the dream of owning your own four walls becomes reality. For a construction financing there are different possibilities. You can read about the different types of financing, their characteristics and when they are particularly useful on this page.
The annuity loan as the most frequently chosen financing model
Planning security is an important argument for the popularity of the annuity loan. A fixed interest period is agreed upon before the conclusion of the contract. This means that the bank and the customer agree on a fixed interest rate that applies for a certain period of time. The installments – also referred to as annuities – always remain at the same level. However, a change takes place within these rates. They are made up of the interest and the repayment. The interest rate is constantly reduced, as it is only charged on the remaining debt, which decreases with each installment. In return, the repayment portion grows.
The fixed interest rate is often fixed for 5 to 15 years. Longer phases of 25 or 30 years, for example, are also conceivable. In most cases, however, the remaining debt has not yet been paid in full by the end of this period. Follow-up financing then comes into play. The bank proposes a new interest rate agreement to the customer for this purpose. If the borrower agrees to this, it is referred to as a prolongation. Alternatively, he can switch to another credit institution that grants him more attractive conditions. There is a so-called rescheduling of the real estate loan.
Of all the types of construction financing, this is by far the most frequently chosen option: Around 70 percent of prospective homeowners opt for this solution. There are still several variants of the annuity loan. One of these is the full amortization loan, where the general conditions are identical with one exception: At the end of the fixed interest rate, the borrower has repaid the mortgage in full. This frees the borrower from debt, making follow-up financing unnecessary.
The forward loan is aimed at this rate. The name is based on the fact that the bank customer can secure conditions at the current interest rate level up to 66 months in advance. It is therefore concluded during the current financing and can be recommended in phases in which rising interest rates are expected in the future.
Good to know: Because of the early loan commitment, banks charge an interest surcharge for forward loans. The further in advance the contract is concluded, the higher the interest rate. For each month mostly between 0.01 and 0.02 per cent are estimated.
The most flexible of all types of construction financing: the variable loan
The variable loan is also considered a special form of the annuity loan from its basic principle. The two variants have in common that the borrower pays regular installments, which are made up of an interest and a repayment portion. The big difference, however, is that the interest rates are not fixed for several years. Instead, they are adjusted every 3 months to the current market level. The Euro Interbank Offered Rate (EURIBOR) serves as a reference. This is the average interest rate at which European banks lend money to each other.
For the borrower, this means uncertainty, because the installments can rise or fall after each quarter. Because of the risk involved, this model is particularly suitable as interim financing. A typical scenario: you are planning to purchase a new property and need a large sum of money in a timely manner to do so. At the same time, you sell your current home and are still waiting for the proceeds to come in. The advantage of the variable loan is that it can be converted into an annuity loan at any interest rate adjustment date. In addition, it may be terminated with a notice period of 3 months and repaid in full without incurring additional costs in the form of an early repayment penalty.
The building savings contract – real estate financing for the future
A building savings contract is suitable for those who plan to buy or build a property in the future and want to use the time until then to accumulate capital. You initially pay money into a savings plan over a period of several years and receive interest on it from the bank. In most cases, between 30 and 50 percent of the contractually agreed building savings amount must be saved – then the building savings loan is ready for allocation. This means that the credit institution issues the paid-in building savings balance, including accrued interest, and the balance as a building savings loan.
This is followed by the repayment phase. The customer now settles the loan in constant installments, which contain a repayment as well as an interest portion. The building society loan is thus also a form of annuity loan. By signing the contract, the customer commits to the residential use of the money. This means that it can be used exclusively for the following purposes:
- Construction of a property
- Buying a home
- Modernization of an object
- Rescheduling a construction financing
- Acquiring residential rights in a nursing home
About the pension or life insurance to home ownership
As part of construction financing, there are also ways to use insurance – specifically, there are 2 options. One of them is to opt for a bullet loan. In this option, the borrower pays only the interest during the term of the loan. For this reason, as an alternative, there is talk of an amortization-free loan. The loan amount is not settled until the end of the contract. For this, the customer must be able to access an appropriately large amount of money on time. For example, a life insurance or pension insurance is suitable for paying off the loan amount.
The step into the own four walls is besides over a policy loan conceivable. The borrower borrows the contract of his life insurance policy in full or in part. This approach is conceivable, for example, if the financing of a property can already be made essentially by equity capital. The policy loan serves to cover the remaining balance.
Solution without equity: The full financing
A rule of thumb is that customers should cover 20 to 30 percent of the total cost through equity when taking out a home loan. However, there is also the option to purchase a property completely without own funds. A so-called full financing makes this possible, whereby still 2 different variants are to be distinguished.
In the case of 100 percent financing, the loan amount is used to pay the purchase price of the property. The incidental purchase costs, which include the land transfer tax, the fees for the entry in the land register and the services of the notary, as well as any brokerage fee, are paid by the prospective owner himself. In the case of 110 percent financing, on the other hand, the loan also covers these expenses.
For the banks, these types of construction financing represent an enormous risk because they involve a particularly large amount of money. Loans of this type are not granted by every credit institution. In addition, applicants must have a high credit rating. Criteria include the following:
- A higher-than-average income
- A secure job (z. B. civil servant status)
- Long-term assets available
- Ideally already existing real estate property
In addition, the property to be financed should be in an attractive location, so that an increase in value can be expected. Due to the usually considerable loan amount, long terms over several decades are usual. Borrowers must also be prepared for high interest rates and high monthly installments. Follow-up financing is also usually associated with large costs.
Mortgage loan: What the term really means
The mortgage loan is not – as might be assumed – another form of loan. In fact, this term is often used synonymously for all types of construction financing. This designation is actually hardly contemporary, because mortgages no longer play a role in this context. Instead, the land charge has priority today.
The land charge and the mortgage are liens on real property. As such, they are entered in the land register as part of real estate financing. They serve as collateral for the bank: If the borrower is no longer able to pay the installments, it can foreclose on the property.
However, there is a difference between these two liens on real property. A mortgage is always linked to a debt. Once a loan has been repaid in full, it expires and must be removed from the land register. This is considered complex and costly. If the property owner wants to obtain a new loan, he must also take out a new mortgage for it. A land charge is not tied to a claim. Once it has been entered in the land register, it can be used for various projects, so that a new note is not necessary for every purpose.
More than one construction financing: Possibilities for combination
It is conceivable to take out more than one loan and to combine 2 types of construction financing with each other. An annuity loan is often combined with financing from the Kreditanstalt fur Wiederaufbau (KfW). Both applications must be submitted at the same time. The KfW grants favorable conditions with a fixed interest rate of up to 10 years. In addition, with some programs it is possible to start repaying only 5 years after disbursement.
An annuity loan can also be combined with a variable loan. The predominant part of the total sum should be financed thereby over the Annuitatendarlehen, which ideally 2 thirds constitutes. The borrower has the security of a fixed interest rate. This can change in the variable loan in 3-month intervals. In most cases, this combination loan is used as a temporary solution and not for a long period of time.
Finally, it is also possible to combine one of the different types of construction financing with an immediate building savings loan. In this case, the loan amount is paid out immediately to the customer, who can then repay it with a building savings contract. Compared to an annuity loan, however, this way is often associated with higher costs.
Conclusion: Types of construction financing are available for every situation
The annuity loan is the most frequently chosen variant for financing a property. Thanks to the constant rates, it ensures planning security. Nevertheless, it does not have to be the first choice for everyone. If the construction or purchase of a property is only planned in the medium term, a building savings contract can also be considered.
A forward loan, meanwhile, is primarily of relevance for follow-up financing. If there is a prospect of a large sum being paid out in the future by a life or pension insurance policy, a bullet loan may be an option. Variable-rate loans are mostly used for interim financing. Ultimately, advice from an expert is always recommended for such an important project as construction financing. It analyzes the personal situation and finds the best solution for it.