Everything you need to know about the current construction interest rates
If you are interested in building or buying property, construction financing plays an important role. However, for many, construction financing presents a hurdle full of numbers and projections that is not easy to overcome.
There are many external and personal influencing factors that you need to consider, which at the same time can also be crucial for your construction financing. One of the factors is the construction interest rates.
Construction interest rates are the interest rates that banks charge when you take out a loan to buy or build a property. The current construction interest rates decide how high the interest rate is for the loan of your construction financing, because the higher the current construction interest rates are, the more it also costs to borrow money from the bank.
Because of the large amount of loans, even the smallest differences in interest rate can have a large impact over several years. We, at Baufi Experts, would like to answer the most important questions about current construction interest rates to make this process easier for you.
What are the current construction interest rates?
A pleasant news for all real estate buyers and builders is that the current construction interest rates, as in recent years, are very low.
Current construction interest rates are currently below 1% for a fixed interest rate of five to ten years and even below 2% for 20 years, but can vary depending on the loan and various influencing factors.
The downward trend in construction interest rates was triggered by the global economic and financial crisis in 2008. As a result, the European Central Bank lowered interest rates and has since pursued a low-interest-rate policy.
Since 2016, the prime rate has been at a record low of 0%. Moreover, the current low construction rates can be explained by the low interest rates on mortgage bonds.
How will the current interest rates develop in the future??
If you are an interested builder or real estate buyer, however, you do not have to hurry to benefit from the current low construction interest rates. Only minor fluctuations in construction interest rates are expected in 2021.
These may be caused primarily by the Corona pandemic, as successes in vaccine development or delays in fighting the pandemic can have a major impact on the economy.
Apart from the Corona pandemic, the level of interest rates can also be affected by political events, such as the tense situation in the U.S. since the presidential election and the implementation of the UK's exit from the European Union.
Since the European Central Bank is decisive for the interest rate level, the ongoing low interest rate policy will continue to lead to low interest rates in the near future. It is predicted that in the short term as well as in the medium term the building interest rates will not increase considerably.
However, a significant upward trend is expected in the long term. This means you should close a loan in the next 4 to 5 years to still take advantage of low construction rates.
How can I benefit from the current interest rates??
Your construction financing depends on various factors, including construction interest rates. You can use the current low construction interest rates to your advantage. You should secure the current low construction interest rates by a long fixed interest rate. In addition to the usual fixed interest rate period of 5 to 10 years, you should consider a fixed interest rate for 15 or even 20 years.
A long fixed interest rate also leads to an interest rate premium, but it is still more profitable and creates planning security. In addition, you have to reckon with rising construction interest rates in the long term and thus you would have to pay high interest rates for a fixed interest rate period of 10 years for the follow-up financing.
An important note on the fixed-interest period is that, according to the law in Germany, every borrower can terminate his real estate loan after 10 years with a 6-month notice period and thus have the option of rescheduling at the then current construction interest rates.
This means that if there should be a surprise lower interest rate in the future, you do not take any risk with a long fixed interest rate. In addition, we recommend you to conclude a high redemption rate.
Although the usual repayment rate is 1%, you should consider a repayment rate of at least 2%. The low interest rate also means many builders and homebuyers can afford a higher repayment rate.
As a result, you will pay off your debt faster and pay less interest as a result. Due to the current low construction interest rates, we recommend a long fixed interest rate for your financing, as well as a high repayment rate.
What influences construction interest rates?
Despite the generally low level of interest rates, you should note that the actual interest rates for your construction financing can vary. The differences are based on various external and personal factors.
External factors include returns on the covered bond market and the bank's profit margin. You have no control over these factors, as opposed to personal factors. Personal factors include credit score, which reflects the borrower's creditworthiness.
A better credit rating also leads to lower interest rates for you. Creditworthiness is checked on the basis of several criteria, such as equity capital. High equity indicates lower risk to banks and therefore leads to lower interest rates.
Another screening criterion is credit experience, which is based on Schufa information and your account history. An essential test criterion for creditworthiness is your liquidity. This is to determine whether you have a fixed and regular income and thus also have the financial ability to repay the loan.
Here, your profession also plays a role, as banks often assume that, for example, civil servants have a secure income compared to the self-employed.
In addition to creditworthiness, the fixed-interest period and the repayment rate also influence interest rates. As mentioned above, a longer fixed interest rate leads to slightly higher interest rates.
Another factor is the mortgage lending value, which indicates the market value of the property. A low loan-to-value can lead to higher interest rates. All these factors influence which interest rate you will be offered by the banks despite the current low construction interest rate.
How to choose a favorable and suitable interest rate?
Once you have decided to build or buy a specific object, the question naturally arises how to find the right loan with the most favorable construction interest rates for your project. The right choice is crucial here, because with the high sums of the loans, even minimal percentage differences can mean a difference of several thousand euros.
To make this significant decision, you have several options available to you. You can single-handedly go to different banks and get a quote and then compare them.
While these offers are then tailored to you individually, you must expect to spend a lot of time and effort doing so. Another option would be to use an online construction interest rate calculator. Here you have a very low time and effort, as you only need to enter details such as the property value, loan amount, fixed interest period and repayment rate into the online calculator to calculate the interest rate.
However, you have the disadvantage here that these interest rates do not take into account the personal influencing factors described above and therefore the actual interest rate may differ from the online calculation. Another option would be to consult a construction financing broker.
With home loan brokers, you not only save a lot of time and effort, but you also get a loan that incorporates your personal influencing factors and also takes your preferences into account. These are not tied to any bank and will take care of comparing different banks and credit institutions for you, as well as other paperwork.
What else do I need to consider for my funding?
With current low construction rates, consider other options such as unscheduled repayments or forward loans. A special repayment allows you to make unscheduled payments on your debt in addition to monthly repayments.
Typically, banks allow unscheduled repayment once a year and up to 5% percent of the loan amount. This will result in faster debt relief and thus you will have to pay less interest.
Another way to use the current low construction interest rates to your advantage is through a forward loan. With a forward loan, you can secure the current low construction interest rates for the future for your follow-up financing.
However, there is a small interest surcharge of 0.01-0.03% for each month that you take out the loan in advance. However, a forward loan is only profitable if interest rates increase in the future, but if they remain the same or even decrease, a forward loan is disadvantageous.
Here it is also important to consider in which phase of the financing you are, because for a forward loan your fixed interest rate period must expire in a maximum of five years. If your fixed interest rate is still longer than 5 years, a forward loan is not possible.
Conclusion
Current construction interest rates are low and will remain so in the short and medium term, except for minor fluctuations. This can be used to your advantage for your construction financing through, for example, a long fixed-interest period and a high repayment rate.
You should therefore conclude the construction financing in the near future. However, it's also important to note that low construction interest rates don't mean low-cost construction financing at the same time.
To do this, you'll need an overall financing plan that's tailored to you, including the appropriate construction interest rates. We would like to present you here a financing concept, which responds to your wishes and requirements.