It is worth comparing construction financing: How interest and repayment affect the costs
02.09.2024, 14:59 Listen to article
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The ECB has just lowered the key interest rates by 0.25 to 4.25 percentage points. This should actually make loans cheaper. But things are different when it comes to real estate financing.
If you compare the offers from banks carefully when buying a condominium or a house, you can save several thousand euros on financing. Over a long term of usually several decades, even a few percentage points after the decimal point of the effective annual interest rate add up. It is also very beneficial to repay the loan quickly and thus keep the term short. The faster the loan is paid off, the less interest is incurred overall. The question arises: how much can the differences in the parameters make?
It is not that easy to find the right balance between interest rate, repayment rate and term. “Many buyers focus on the monthly rate they can afford,” says Roland Stecher, financial expert at the Bremen Consumer Advice Center. “We recommend not spending more than 30 percent of your net income on the property loan.” However, the interest rate can make a difference of several thousand euros if this monthly rate is used either to pay most of the interest to the bank or to repay as much of the loan as possible.
According to the current construction interest rate comparison by the magazine “Finanztest” (9/2024), construction interest rates currently start at around 3.2 percent for 80 percent financing with a 10-year fixed interest rate. Depending on the provider, however, interest rates can also rise to 4 percent. “That’s moderate, but of course high compared to the absolutely low interest rate phase a few years ago,” says consumer advocate Stecher. “In addition, real estate prices are rising, so builders need large loans.”
Example calculations illustrate the effects
Sebastian Schick, editor-in-chief of the financial platform biallo.de, recommends that interested parties first check the terms and conditions with their own bank and then consult an online bank. “If you then obtain the terms and conditions from an independent credit broker, you will get a good overview of the current values,” says Schick.
“In order to compare the conditions of the banks, you have to get offers in which the term, monthly rate and repayment conditions are the same,” says Max Herbst from FMH-Finanzberatung. “Otherwise you lose track.”
Several example calculations prepared by Herbst show how much even small differences in interest rates add up in the end: A customer pays a monthly rate of 1806.67 euros for a loan of 400,000 euros. With a nominal interest rate of 3.42 percent and a repayment rate of 2 percent, he has paid 121,577 euros in interest after 10 years of fixed interest. The loan has been repaid by 95,223 euros by then. The remaining debt is 304,777 euros. If the financing continues under the same conditions after ten years of fixed interest, the builder would need 29 years and 3 months to pay off the loan in full. He pays a total of 232,883 euros in interest.
You have to be able to afford higher repayments
If he takes out a 400,000 euro loan with the same monthly rate of 1806.67 euros at an interest rate of 3.52 percent – just a tenth of a percentage point more – he can only pay off 1.90 percent. In this case, the interest amount over the entire term would be 246,588 euros, which is 13,705 euros higher. The builder also needs seven months longer to pay off the total amount than in the example with the cheaper interest rate of 3.42 percent, i.e. 29 years and 10 months.
It can also make sense to accept a higher monthly rate in favor of a higher repayment. If you finance the loan of 400,000 euros with an interest rate of the initial 3.42 percent and repay it at 2.3 percent, you will have to pay a slightly higher monthly rate of 1906.67 euros, which is exactly 100 euros more than in the two previous examples. This only takes 26 years and 9 months and you pay 210,372 euros in interest over the entire term. This means that the interest burden is 22,511 euros less than with a two percent repayment under otherwise identical conditions – and the loan is repaid two and a half years earlier. “But the rate is also higher, and you have to be able to afford it,” says Herbst.
Repayment rate of two percent should be possible
The repayment should not be too low from the start. “A repayment rate of 2 percent should be enough in the current interest rate environment, but 2.5 to 3 percent would be better,” says Sebastian Schick. However, many builders would reduce their repayment rate if interest rates increased after the fixed interest rate period, so that the monthly rate remained the same. But this is clearly noticeable in the term and interest payments.
The lower the repayment rate, the longer it takes to pay off the loan in full. “The loan term can almost double,” says Roland Stecher. But speed isn’t everything, the consumer advocate points out – because as the repayment increases, the monthly burden also increases. If you put every cent into the monthly installment, you end up with less money to live on – and that’s not the right path for everyone.
In addition to comparing interest rates and repayments, it is important to keep the financing as flexible as possible. “Customers should only accept offers that give them the right to make special repayments without a surcharge,” advises Sebastian Schick. The option of changing the repayment rate if necessary is also an important criterion. “This enables the customer to react to possible changes in their financial circumstances during the term.”
He can then, for example, pay off a larger sum in one lump sum each year, perhaps after a life insurance payout or an inheritance. Conversely, the repayment rate can of course also be reduced in favor of a lower monthly payment if things get tighter financially.
Building loan interest rates in comparison
