Construction Financing

A construction or real estate financing enables the realization of the dream of home ownership. The loan is earmarked and is used for the construction, purchase, modernization, or renovation of a house or apartment. The repayment of the loan is made in monthly installments, consisting of repayment and interest. 

The most common loan form for construction financing is the annuity loan. Here, the monthly installment remains constant throughout the term, providing planning security. The composition of the annuity (installment) shifts over time. Initially, the interest portion is higher, and relatively little of the loan is repaid. This weighting changes steadily, so that at the end of the term, the repayment portion becomes increasingly higher while the interest portion decreases.

Important Criteria for Construction Financing

1. Creditworthiness: Before approving a construction financing, I check the creditworthiness of the borrower. This includes evaluating the income and asset situation, as well as obtaining a credit report from Schufa.
2. Equity: Banks usually require a certain share of equity to minimize the risk of construction financing. A rough guideline is 20 to 30 percent of the financing amount that should be available as equity to cover costs such as broker fees, property transfer tax, or notary expenses. The higher the equity, the more favorable the loan conditions typically are.
3. Interest Lock-in: When concluding a construction financing, the interest and repayment conditions (interest lock-in) are fixed for a certain period (usually 10 or 15 years). This creates planning security. Those who expect rising interest rates should agree to a longer interest lock-in. After the interest lock-in period expires, a follow-up financing for the remaining debt is concluded at the then-current conditions and with a new interest lock-in. 
4. Repayment Rate: The repayment rate is set at the conclusion (e.g., 4%). Depending on the financial scope, it should be chosen as high as possible so that the loan can be paid off more quickly. Typically, the repayment rate can be adjusted during the term (usually once a year).
5. Collateral: To secure the construction financing, I usually require collateral, such as a mortgage on the property being financed and a life insurance policy for the borrower in the amount of the loan sum.
6. Special Repayment: To pay off the construction financing more quickly, a special repayment can usually occur once a year. This is typically limited to 5 percent of the loan sum at most banks.
7. Subsidies: The construction project may be eligible for various programs (e.g., KfW loans, housing construction premium) or receive support from the government.