Demand currently exceeds supply in the real estate market. Therefore it means for prospective buyers to be fast. That's why more and more prospective buyers of existing properties are securing their construction financing loan before the purchase negotiations are complete. Or the construction financing contract is already signed before the construction of the home starts. But already with the signing of the construction loan, the clock starts ticking. Because then the period for commitment interest begins to run. And then fail to call in the entire loan within that time period, incurring commitment fees. This can add up to quite a bit of money and make the loan more expensive in an unplanned and often uncalculated way. But there is something you can do about it.
Commitment interest rates can be a good deal for the bank
Paying interest on money promised by banks because you don't retrieve it on time? Unfortunately, this is part of the everyday life of builders and real estate buyers whose purchase negotiations drag on unplanned. Commitment interest can make ivespecially long construction projects expensive. The problem: a construction financing loan is earmarked for a specific purpose. This means that you can not simply transfer the entire loan amount. Portions of the loan amount will not be transferred by the bankl until appropriate invoices for construction phases and trades are received or when the purchase agreement for an existing property or condominium has actually been signed by all parties. If the payment margins specified in the construction financing loan are exceeded, banks charge additional interest for this overdraft. And that can be expensive.
What is commitment interest?
Commitment interest is compensation for banks that miss out on interest payments due to extended terms. Because the interest charged by the bank, which is fixed in the loan agreement, is only calculated on the amount that is actually paid out by a certain date. Is the construction loan based on z. B. 300.000 euros per measure, but z. B. only 10 percent paid out, the interest is also only paid for these 30.000 euros due, The bottom line is that in the case of term-limited loans – such as z. B. an annuity loan – in the end would receive less interest payments as calculated.
In this case, commitment interest is not included in the effective interest rate of the loan. Thus, commitment interest can become a good business for banks, as the interest rate for it is in most cases higher than the loan interest rate. The debit interest rate is currently 3 percent per year. The current annual effective interest rate, on the other hand, is less than two percent on average. With a loan amount of 300.000 euros, the additional interest payable adds up to 9.000 euros per year.
Can you avoid commitment interest?
Avoidance of these uncalculated additional costs is not so difficult at all. In order to avoid that already with smallest delays these interests become due, there is the component of the "provision interest-free time". In that case, the borrower only pays interest on the amount actually disbursed at that time. Not only must the borrower be aware of this possibility, but in some cases he or she must negotiate it with the lending bank before signing the contract.
The time spans of the provision interest-free periods vary from bank to bank: from one month to one year, in a few cases even 15 months – are offered by banks. But these times must be fixed in the loan agreement before you sign the construction financing offer. In addition, it is possible to negotiate an extension individually if you z. B. Know up front that new construction will take longer because you're putting in a lot of your own labor, for example. While this may increase the interest rate offered – the bottom line can be far more favorable than falling into the "commitment interest rate trap". Also important to know: The time extension granted begins as soon as you sign the contract. From then on the clock is ticking.
Also possible: use equity later
Construction finance loans also stipulate the order in which debt and equity must be used. Standard is to have to use equity first before credit can be used. If you are allowed to use the borrowed capital first, however, this allows you to cushion any delays with the equity you then use later. This is another way to avoid commitment interest. That's why, especially for new construction, it's important to keep an eye on the exact definition of when to use debt and equity, in addition to the provision-interest-free period. Both should be considered before opting for the seemingly cheapest interest rate offered. Because the non-calculated interest for the provision of the borrowed capital quickly nullifies the interest advantage of the supposedly most favorable interest rate.
The special trick: use the interest-free period for follow-up financing
Since banks offer a provision interest-free period also of 12 months, one can use this for the follow-up financing. If the interest rate is particularly favorable a year before the end of the initial financing, you can already secure it for the follow-up financing without having to take out a forward loan, whose interest will cost you a percentage point or two more. Forward loans are always an option when an interest rate turnaround is imminent and interest rates will be higher in the future. However, these offer the option of securing the most favorable interest rates even 2 or 3 years before the initial financing expires, while follow-up financing, for which one uses the option of the provision interest-free period, can normally only be concluded one year in advance. In both cases, however, the following applies: once the follow-up financing contract with a lead option has been signed, it is no longer possible to withdraw without incurring a non-acceptance fee for the bank.
Before you decide: Take advantage of bank-independent advice
Specialized, bank-independent construction financing intermediaries such as Accedo AG can optimally help you with questions about initial and follow-up financing to find the best and most favorable construction financing for you. These intermediaries know the daily updated offers of more than 400 construction financing banks, know how and where to secure maximum provision interest-free periods and how to find the most favorable alternative for follow-up financing. In addition, they negotiate customized financing for you with maximum flexibility. This then includes questions about special repayment options that are as high as possible and free of charge, or adjustments to installments, repayments and interest rates during the term of the contract. So your construction financing is tailor-made, flexible, favorable and safe. It's not the cheapest interest rate offered that counts, but the overall package that determines how much money you can save in the end. This advice is always free of charge at Accedo AG – regardless of whether you then conclude your construction financing with Accedo AG or not.
Commitment interest can make construction loan more expensive if you miss deadlines. Therefore, choose financing with the longest possible term.