Many dream of building their own house, but hardly anyone can simply put the construction costs on the table. If you are not lucky enough but have found a suitable plot of land to build, you may be able to finance the costs of buying the plot and building it with a building loan. So that there will not be a bad awakening someday, because the credit rates can no longer be serviced and there is a risk of foreclosure, borrowing needs to be carefully considered. In this article, you will receive important information about the topic of building loans, which can help you consider before you take out a building loan.
The financing calculator is operated and made available by Lite Lender. All information therefore without guarantee. Lite Lender is an association of over 30 financing consultants across Austria, who will be happy to advise you personally, transparently and competently on financing. The advantages of unbound financial advice are obvious. As a rule, a single bank has very few financing products or instruments available and often also does not have an independent view of your own individual situation. An unbound financing advisor, on the other hand, knows the advantages and disadvantages of each of many different financing instruments and institutions and can get the best out of your current situation for you.
What is a building loan?
The purpose of a construction loan is to finance a house construction. But a building loan is not just a building loan. There are various forms or financing models that are referred to as building loans.
Annuity loan – the classic building loan
The classic form of a construction loan is an annuity loan. With this flexible loan model, the loan amount is repaid in monthly installments. The installments consist of a repayment and an interest component. The repayment component is initially relatively low, while the interest component is correspondingly higher. This ratio is automatically reversed over time due to the decrease in the remaining debt, so that towards the end of the term, only a small portion of the interest is paid, but more is repaid.
Fixed-rate loan – construction loan for investors
Another form of home loan is a fixed-rate loan. In contrast to the annuity loan, this construction loan only pays interest during the entire term. A repayment is only made at the end of the term. In order for the loan amount to be repaid in one go when it is due, the fixed loan is usually tied to an investment (for example, life insurance or a share fund). In the best case scenario, the proceeds from the investment can then be used to fully repay the loan. This form of financing is particularly suitable for home builders who prefer not to live in the property themselves but rather to rent it out because of the tax deductibility of the interest cost of rental income.
Home loan – the building loan for long-term planners
There is also the option of taking out a home loan, among other things. However, a home savings contract is required as the basis for this. At the end of the building society loan, this must have reached the agreed saving amount. This means that a certain lead time is necessary for the home loan. This means that this financing model does not work if the building plans are already up to date but there is no corresponding home savings contract.
How much must the building loan be?
An important point when financing a house construction is the amount of the building loan. It shouldn’t be too high. Finally, the amount borrowed must be repaid with interest. On the other hand, the building loan should also not be calculated too tightly so that it does not become financially tight at the end of the construction phase.
How much money is needed for the construction?
In order to determine the optimal amount of the construction loan, it is therefore necessary to find out how much money is actually needed. The costs of building a house always include the purchase price for the property and the construction costs for the home. In the case of the latter, it is often forgotten during planning that costs are incurred not only for the structural work, the technical equipment of the house and the expansion (e.g. sanitary equipment and flooring), but also for the furnishings (e.g. furniture and curtains), outdoor facilities and Co.
In addition, the incidental costs may not be forgotten. These are mostly underestimated, but make up an amount that should not be underestimated. The additional costs include:
- Realtor commission
- notary fees
- Land registration fees
- Real estate transfer tax
- Bank processing fees
- Building permit costs
- Architect fees.
In addition, a sufficient reserve for unforeseen costs should be planned for the construction loan. A good buffer is about 15 percent of the cost.
How much money can you raise yourself?
Since, in the case of a house construction, the full amount is not usually financed through a building loan, but rather a certain proportion of equity is brought in, the amount of equity must also be taken into account when considering the amount of the loan. Because the more equity capital is brought in, the lower the building loan can be. At the same time, this also has the advantage that the conditions of the loan are better in case of doubt. A shorter term is then possible, for example, which results in less interest being paid.
Equity should at least cover the ancillary construction costs. It is a good basis if equity capital of 20 to 30 percent of the total construction costs is brought in. If you do not have equity in your account, you may have a savings account or you may be able to obtain the equity in some other way. Examples are:
- Termination of life insurance
- Assertion of severance claims
- Taking out a private loan within the family
Can the construction loan be financed?
If it is clear how high the loan amount must be so that the construction of the dream house can be financed, it must be clarified before concluding the loan contract whether the building loan can be financed or the monthly installments can be paid.
To find out, a cash register should be made. This includes on the one hand the monthly income and on the other hand the fixed monthly expenditure for groceries, car, clothing, insurance, internet, telephone and Co. It should not be forgotten that the monthly rent is lost, but still the operating costs still have to be paid and in the future one or the other repair work on the house may be incurred. In addition, reserves for other unforeseen expenses, such as a new washing machine or the repair of the car, should also be planned.
In addition, it should also be taken into account that living conditions can change during the term of the construction loan and that these can have a lasting impact on the financial conditions. This includes, for example, changing or even losing a job, family growth and more.
Take out a building loan or not?
Financially everything fits and the rates of the construction loan can currently be served well, but there still remains a certain residual risk. Sometimes there are ways to protect yourself from it, but sometimes not. Protection can be provided, for example, by unemployment insurance or disability insurance. In the event that the main donor dies, a life insurance policy can protect the surviving dependents and secure further payment of the installments.
In conclusion, therefore, only everyone can decide for themselves whether to take out a building loan or not. When deciding and weighing up residual risks, the advantages that a home brings with it should always be considered. For example, there is no monthly rent to be paid that benefits the landlord and that may be increased from time to time. On the other hand, the installments for the construction loan have to be paid and the interest rates can rise if they are not fixed by an interest rate fixation. However, a bit more ownership of the home is acquired with each installment paid. In the home, there is also no threat of termination due to personal needs and there is significantly more freedom in the design of the living space.