Home loan comparison: With low interest rates in your own home.
Interest, repayment, commitment period: components of building loans
Many Germans dream of owning their own property. Be it the family home with a garden in the country or the modern condominium in the center of the big city. Some want to live in the property themselves, others rent it out or use it as an investment. No matter whether new construction on a plot of land or the purchase of an existing property – only a few will be able to pay for the project out of their own pocket.
Therefore, future builders and homeowners have to resort to outside capital provided by banks or other financial institutions for a fee (interest): the home loan. In contrast to ordinary installment loans, a construction loan is tied to residential purposes. So it may only be used for the construction, purchase or modernization of a property.
Home loans – often called home finance, home loans or real estate mortgages – come in different forms and with many individual adjustment options. But all construction loans consist of the same elements, some of which also form the terms of the loan. The most important components of a construction loan are explained below.
Interest is the fee that the borrower pays to the financial institution for the provision of a loan. The interest rate is given as a percentage of the borrowed capital and is always calculated based on a certain period, usually per year. Then one speaks of the annual interest rate.
Mortgage rates for construction loans are currently at a historically low level. Anyone who took out a building loan in 2008 often had to settle for interest of around 5 percent. Today, mortgage rates fluctuate between 1 and 2 percent with a good credit rating and short fixed interest rates.
Since many experts expect interest rates to rise again soon, the so-called interest rate turnaround, the short-term conclusion of mortgage lending can be particularly worthwhile in order to quickly secure the low interest rate.
Fixed interest rate
The debit interest rate specifies the period in which the interest and most other conditions of your building loan cannot be changed. The bank may not raise the interest rate on the bank loan if the general interest rate level in the market rises, nor may you hope for lower interest rates if the market situation changes in your favor during this period.
As soon as the fixed interest period has passed, you need follow-up financing for the remaining debt. You are then free to finance the remaining debt with another financial provider and on possibly better terms. The usual fixed rates start at five years and extend over ten, 15, 20, 25 and up to 30 years.
Which fixed interest rate is right for you? In phases of low interest rates, as we are currently experiencing, you should opt for a long fixed interest rate, so at least ten years for the low interest rates to secure as long as possible. On the other hand, in periods of high interest rates, a short rate fixation makes sense, as lower interest rates can be hoped for in connection financing.
Repayment is the repayment of the loan to the lender. The repayment rate is the percentage of the loan amount that the borrower pays monthly for this.
With every monthly installment paid, the remaining debt on your loan is reduced. As interest is always calculated on the remaining debt, there is a constant shift in the amount of principal and interest paid within the monthly installment. The share of interest payments decreases, the share of repayment increases. That is why one often speaks of “initial repayment” when creating the optimal financing strategy.
It follows that an optimal repayment plan can be more important for cheap real estate financing than getting a low interest rate. Because the higher the repayment rate, the faster the building loan is paid off – and the less years you pay interest. You can play through the influence of the repayment rate on interest payments and the term of the loan yourself in our mortgage calculator.
Another way to reduce the residual debt of your building loan is through special repayments. This means the possibility of making additional repayments outside of the normal monthly rhythm.
Many home loans offer borrowers the option of making a certain number of special repayments up to a certain amount (for example, between 5 and 10 percent of the net loan amount or a fixed amount per year). This is usually free of charge, although some providers charge an interest surcharge for the right to special repayment.
You should plan for special repayments if you expect unscheduled cash inflows, for example from salary bonuses or inheritances. They are a good way to further shorten the term of the loan.
As a rule, future builders or homeowners pay part of the financing out of their own pocket, i.e. with equity. But how high should the share of equity in the total amount of financing be? Basically, the higher the better!
With a high equity component, the risk of over-indebtedness decreases if, for example, the building loan has to be canceled for private reasons. Not only does the risk for the client decrease with high equity, but also that of the bank. That is why credit institutions reward high equity with lower interest rates. The experts at Best Lender advise that you bring in at least 20 percent equity when buying a house or building projects. 40 percent would be even better.
A full financing without equity is riskier and therefore more expensive, but of course also possible. You can find out more below.
The monthly installment that you, as a borrower, pay to the bank for the loan is made up of the loan amount, the borrowing rate and the repayment rate. The formula applies:
|Rate =||Loan x (interest + repayment)|
Alternatively, you can use the Best Lender mortgage calculator to run through various mortgage loans and quickly and easily calculate the monthly installment for your home loan.