What is construction loan

A construction loan is usually a purpose-built loan for financing the new construction of a property. Accordingly, the construction loan may be used exclusively for the construction of the property and for no further purpose. As collateral, a land charge in favor of the bank is generally entered in the land register. Thus, if the debtor fails to meet his obligations, the bank may sell or foreclose the house after certain steps. Additional collateral may be required. The term of a construction loan is usually 10 to 30 years and amount to a correspondingly high loan amount.

Which types of loans are typical and what is the interest rate commitment?

In Germany, a construction loan is usually equipped with a fixed interest rate of 5, 10 or 15 years. An interest rate is guaranteed for this period. That gives planning security. Thereafter, renegotiation. The interest depends on the market situation and the European interest rate. Here, caution is advised, as very scarce financing at a low interest rate may no longer be sustainable should the interest rate rise after the fixed interest rate has expired. Currently, the loans are cheap to acquire due to a persistent low-interest phase. However, if these general market rates are significantly higher at the end of the fixed interest rate, you could face a significantly higher monthly burden.

The most common form of a construction loan is the annuity loan, where the borrower pays constant installments. The decreasing loan amount reduces the interest-to-repayment ratio with each installment. In other words, at the beginning of the term, many interest rates are paid at the same rate and much is paid towards the end.

Term, termination and risks of a construction loan

As borrowers are often relatively large sums that have to be paid off over a long period of time and can lead to a precarious situation under the wrong circumstances, the personal situation, the general framework and the form of financing should be analyzed in detail before concluding become. Competent and neutral advice is indispensable. In addition, it is recommended to sign only a perfectly understood contract, as it brings such a great deal of consequences.