Is your construction financing running out? A new loan can be up to 37 percent more expensive – this is what buyers need to know now

Interest rates are higher than they were 10 years ago – but how does this affect construction financing and follow-up loans? – Copyright: picture alliance / SvenSimon | Frank Hoerman

It was almost exactly ten years ago that the Loan interest below two percent for the first time. Loans were suddenly affordable and the dream of owning a home was now a reality for many. Things are different now. The interest rate for a ten-year loan is currently 3.55 percent. That is 1.6 percentage points more than in 2014. This has concrete consequences, especially for people who are Construction financing have to readjust. Because follow-up financing can be expensive.

But what does this mean for property-Buyers actually know exactly? Together with Business Insider, Immoscout24 has worked through a total of three examples. The result is clear. Whether the increased interest rates affect the follow-up financing depends not only on the loan amount but also on the choice of repayment rate.

1. Example: For smaller loan amounts such as 350,000 euros and a previous repayment rate of one to two percent, the future monthly rate of the follow-up financing increases moderately.

   If borrowers now take out a building loan with an interest rate of 3.55 percent as follow-up financing, the monthly rate increases with the same interest rate and the same repayment rate. They now have to pay 110 euros more, i.e. 1261.60. This means that borrowers have to pay 9.5 percent more per month than before.

2. Example: For higher loan amounts from 550,000 euros and a previous Repayment rate of one to two percent, the monthly rate of the follow-up financing can become up to 37 percent more expensive.

   Anyone who financed the loan ten years ago with an annual repayment rate of one percent only had to pay 860.42 euros per month. These buyers now have a remaining debt of 311,389 euros after the fixed interest rate period has expired. However, if the borrower now takes out subsequent construction financing with a further repayment of one percent, the rate increases by around 20 percent per month to 1034.28 euros. This corresponds to an increase of 174 euros per month.

3. Example: Anyone who has repaid three percent annually and plans to continue doing so in the future will have to pay less each month than before, despite higher interest rates.

   If the loan was taken out with an annual repayment of three percent, the monthly rate would be significantly higher. However, the remaining debt after ten years is significantly lower. The rate for follow-up financing with 3.55 percent interest and a repayment of three percent is therefore 38.5 percent cheaper than the previous rate. In this case, borrowers can look forward to savings.

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Expert for construction financing advises foresight

These calculation examples illustrate how high the monthly loan installment for the subsequent construction financing would be if the loan amounts were 350,000, 550,000 and 750,000 euros in 2014. The construction financing in the example had an interest rate of 1.95 percent at the time.

“Many people took advantage of the low interest rates ten years ago and bought a property. Buyers who took out a large loan at a low repayment rate at the time are now facing a significantly higher monthly burden when taking out follow-up financing,” says Gesa Crockford. She is Managing Director of Immoscout24The additional costs for follow-up financing are higher the lower the initial repayment rate was. The reason for this is that “the new, higher interest rates are now being applied to a higher remaining debt,” says the expert.

Real estate expert: Gesa Crockford is managing director at Immoscout24. – Copyright: Immoscout24

Anyone who has taken out a significantly higher loan amount must expect an even higher financial burden with initially low repayments. This is illustrated by the calculation examples with a loan amount of 550,000 and 750,000 euros.

Planning the follow-up financing early – ideally six to twelve months before the end of the fixed interest rate period – creates room for maneuver. This allows buyers to compare offers and negotiate better conditions. “It is worth not only looking at the interest rates. It can also help to pay attention to flexible conditions such as special repayments,” says Immoscout24. higher repayment rate could help to reduce the remaining debt more quickly.

Although this leads to a higher monthly rate, it can lead to significant savings in the long term. Choosing the right interest rate also plays an important role: Longer interest rate fixations offer more security. Shorter fixed interest periods, on the other hand, often offer lower interest rates. However, they can also entail the risk of interest rate increases. A financial advisor can help you make the best decision for your individual situation, says Immoscout24.