Low building rates for a long time can be expensive

The interest on construction loans can be fixed for many years. Often times this is not a good idea.

Financing a property should be carefully considered.

VTwo years ago, the world was still okay for property buyers: the purchase prices were high, but still significantly lower than they are today. But above all, building loans were cheaper than ever. In some cases, they no longer cost one percent interest a year. Today around 0.3 percentage points more have to be paid, which makes considerable differences due to the long term of the loans.

Most forecasts assume that interest rates will continue to rise, especially in the long run. Nobody expects that in 15 or 20 years they will be as cheap as they are today. So anyone who buys a property now and finances it with a loan wants to secure the low interest rates for as long as possible. In financial jargon, this means that you have to choose the longest possible fixed interest period for your loan. The disadvantage: He then pays a higher interest rate than with a shorter duration. In the end, a shorter bond could be the cheaper option even if interest rates rise significantly.

A couple of calculation examples

Fixed interest periods of 15, 25 and 30 years are compared. No bank currently offers more than 30 years, hardly any institute under 15 recommends. During this period, the finance house may only demand the interest agreed at the beginning, regardless of how high the market interest rate is. This should give real estate buyers planning security. For 30 years of fixed interest rates, more than two percent interest currently has to be paid, for 15 years an average of only 1.5 percent. The exact interest rate depends on many parameters: above all the creditworthiness of the debtor and the amount of equity. Anyone who does not bring their own money into the financing (100 percent financing) has to accept a hefty interest premium. With fixed interest rates for 15 years, an average of 0.6 percentage points more must then be paid than with 80 percent financing (i.e. 20 percent of your own money).

On the other hand, there are less large interest rate differences of no more than 0.2 percentage points between high and lower loan amounts and high and low repayment rates. High loan amounts and a small repayment are then “punished” with an interest surcharge. The visually low interest rate differences add up over the long term to considerable additional costs, which can amount to tens of thousands of euros. A long fixed interest rate is therefore only justified if interest rates rise significantly. Nobody knows that, of course, and so the sample calculations serve above all to get a feel for the risk that real estate buyers take with a short fixed interest rate. Readers can test this more precisely for their individual situation with the FAS “fixed interest rate calculator” developed in-house.

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When will i be debt free?: The fixed interest rate calculator

An example with a loan of 380,000 euros and 20 percent equity has shown that a long fixed interest rate of 30 years is not worthwhile. Even if interest rates rise to four percent, as they did eight years ago, it is better to choose only 15 years of fixed interest rates. That saves 35,000 euros in interest, and the house is even paid off a year earlier. Even 25 years of commitment would then be too long. If the interest rate rises to five percent, as in the normal interest rates before the financial crisis, 30 years of fixed interest rates are also too expensive. In this case, however, 25 years is better than 15 years. Then the house is paid off a year earlier than with a 30-year fixed interest rate.

One conclusion

A very long fixed interest rate is convenient because you have planning security. And when the property is as good as paid off, there is no risk that significantly higher interest rates will make the monthly burden soaring. But the financing costs of the short bond can be significantly lower, depending on the case, and the risk of a rise in interest rates is manageable. In addition, the customer has more choice of banks for retention periods of less than 30 years. This increases the chance of getting a slightly lower interest rate through good negotiation and comparison.

The choice of the fixed interest period also depends a bit on the other construction of the construction loan. Anyone who can provide little of their own money, for example, should choose a long fixed interest rate with high loan amounts and only a moderate monthly rate in order to limit the risk of a sharp rise in interest rates. And if you choose a short bond, you should bring yourself to a high repayment of three percent or more, even if that means a higher burden per month. Then the remaining debt shrinks faster and with it the amount that could be exposed to a higher interest rate after the fixed interest rate.