Useful tips around the construction financing

Useful tips around the construction financing

Strategic alignment of construction financing Experts were certain a few years ago - mortgage interest rates will not fall any further. At that time, the interest rate was 1.5% for a ten-year fixed interest rate, currently the same loan is available for 0.5%.

And it can be assumed that the current low interest rate level will continue for the coming years. In this context, building owners have to consider an important context. The lower the interest rate, the longer the repayment phase. What sounds absurd at first glance becomes clear when you look at the system of annuity loans. The annuity is the fixed monthly amount paid by the builder. This consists of the interest and the repayment. With each monthly repayment, the interest portion decreases. And the higher the interest rate, the faster the repayment share in the annuity grows.

If interest rate is low, higher repayment applies Due to the context described above, the redemption phase can shift significantly backwards when interest rates are low. While only years ago a repayment of 1 % was sufficient for construction financing, many banks now require a higher redemption payment. An overview of the requirements and offers of different banks consumers get in a construction financing comparison. In particular if the owner is already over 40. A repayment of 2% is now common for new real estate loans. Although this increases the annuity, in the long term the builder-owner is more quickly released from debt and can really call his own four walls his property.

High purchase prices put a heavy burden on the builderowner The previous considerations were based on the assumption that only the interest rate has decreased and the annuity for the property has remained the same 10 years ago and currently. However, the reality is quite different. In fact, real estate prices have risen by 50% or more in the urban centers. If you bought a property for 300,000 Euros 10 years ago, you paid an annual annuity of 7,500 Euros (1.5 % interest, 1 % initial redemption) according to the above examples. However, in the case of a current construction financing, 450,000 Euros must be taken up. However, the annual annuity is now 11,250 Euro. A significant increase compared to a financing ten years earlier. In this example, the client has about 3,750

euros less in his pocket. A not inconsiderable amount that is missing in the household budget. For this reason, building owners should find out how they can save taxes and costs when buying a house.

Strategically finance the real estate loan From the balancing act of a high repayment and the associated faster debt relief and the corresponding loss of liquidity, a compromise has to be found. Here there are two alternative ideas, with which the owner is faster entschuldet and can improve thus also faster its liquidity. The first alternative is a loan in different amounts and terms. In addition a small example. Again a construction financing of 450.000 Euro is assumed. In this case the loans are split. A larger loan is locked with 400.000 euro and 10 years running time, a smaller one with 50.000 euro and only five years running time. The trick now is that the smaller loan is fully repaid in the first five years. This is achieved primarily by ensuring that the larger loan has a low repayment rate and that the amounts saved are put into the repayment of the smaller loan. After five years the smaller loan is almost completely repaid. The now additional liquidity can be partially or completely used to repay the large loan for the next five years.

Note special repayments Who structures its construction financing as described above, which should consider however the special repayments. When concluding the loan, it is imperative to consider that unscheduled repayments are permitted. The maximum amount is usually 5%, but some banks also allow larger annual special repayments. In the example above, however, 5 % is completely sufficient.

Investing instead of repaying - the freestyle for building owners However, there is another alternative for strategic construction financing. Here the loan is repaid only with the minimum repayment rate of 1%. A further percent is not put however into the direct repayment. Rather, different funds or ETFs are bought with it every month. The idea is simple and straightforward. Over the years, equity funds or ETFs develop with an average return of 5 to 6 %. And because equity investments have always compensated possible losses over a longer period of time, any risk of loss is also low. However, some rules are important. First, you should invest in different funds or ETFs. This provides further risk diversification. The second rule is that possible profits should be realized once a year and then the shares are bought back. In this way, you make the best possible use of your tax allowance of 801 euros for single investors and 1602 euros for married investors.

How could the effect look like?

The loan for 450,000 euros is again assumed. In case of a 2% redemption, approx. 95,000 Euro will be repaid after 10 years. If only 1% is repaid, the redemption amount is halved to 47,500 euros. At the same time, however, another 4,500 euros are invested in funds each year. With an increase in value of 5% the compound interest effect adds up to approx. 60,000 euros. Compared to a classical 2% repayment an increase of 12,500 euros. After 10 years, it should then be considered whether the amount saved should be used for partial repayment when a new contract is concluded or whether this form of strategic repayment should be continued for another 10 years.