Demand for home financing is at an all-time high while interest rates are currently falling. What consumers should definitely pay attention to when making a loan agreement.
The interest rates for building financing fell again at the end of October. Depending on the bank, they range between three and almost 4.5 percent. This is shown by data from the financial consultancy Max Herbst (FMH) from Frankfurt am Main.
The Bundesbank’s regular bank survey shows that demand for construction financing has reached a record high. On the one hand, the lower interest rate level is tempting, but on the other hand, data from the Federal Statistical Office shows that real estate is likely to become more expensive again.
The principle of the mortgage
The term “construction financing” encompasses both new construction and the financing of finished houses and apartments. Every property and every house has a land register sheet in the land register, which is kept by local courts.
Anyone who buys a property or house usually takes out a mortgage, which is entered in the land register. This gives the financing bank a lien if the loan is not repaid properly. Building financing is therefore very safe for the bank because it can sell the house if necessary. Construction financing usually runs for at least ten years. During this time the interest rate is guaranteed.
interest and repayment
In addition to the interest payment, the loan is continually repaid. At least one percent per year is usual at the beginning. If you can somehow afford it, you should initially repay two or three percent per year. If the repayment is low at the beginning, a building loan can become a lifelong companion.
Borrowers pay a monthly installment to the bank and not interest on the one hand and repayment on the other. Over the years, the loan amount decreases as it is repaid. The remaining balance also costs less interest. While the interest portion of the monthly rate decreases, the portion that is used for repayment increases.
Anyone who is currently taking out financing at a very low interest rate can consider committing themselves and the bank to a 15-year term. Then you have security against possible interest rate increases. However, banks can pay for this additional security through slightly higher interest rates. According to FMH, mortgage loans currently cost an average of 3.31 percent over ten years and 3.54 percent over 15 years.
Surcharge for follow-up financing
If you bought or built many years ago, your financing may be extended. Those who get from old high interest rates down to new low interest rates when concluding a new loan agreement are lucky. The money saved can be used for higher repayments with the same monthly rate. In any case, the loan amount has fallen after ten or 15 years, leaving more room for repayment. This means that an end is in sight.
But what if an old loan agreement only expires in six months or even a year? Borrowers can now conclude a contract with their existing bank or a new bank for the period afterwards. Since the banks have to reckon with having to pay out a cheap loan at today’s interest rate if interest rates rise later, they charge a surcharge.
This varies from bank to bank and can be negotiated. Such follow-up financing is an option for customers who expect interest rates to rise again – or who value a peaceful night’s sleep.
