Real Estate

Real estate construction loans: beware of follow-up financing

Bonds from the Federal Republic of Germany are considered extremely safe and are therefore popular with investors around the world. The interest in the paper is so great that for some time investors have even paid to have it in their custody account. All bonds issued by the German government are currently in the red. Banks base their building rates on the yield on Pfandbriefe, which in turn depend on the Bund yields. As a result, interest rates on building loans have fallen in line with the yields on federal bonds in recent years.

The corona crisis could now prove to be a game changer in the property finance market. The government’s massive aid packages are also influencing the demand for secure federal bonds. Experts like the board of the financial service provider Dr. Klein, Michael Neumann, is expecting state aid totaling more than one trillion euros. “As necessary and sensible as the state aid is in the current situation, it is likely that it will have an impact on the demand for federal bonds and cause their yield to rise again,” explains Neumann. He therefore expects that building rates will also rise in the course of the year.

Higher interest rates are likely

Consumers do not have to fear a sudden increase, says Neumann. The reason: The European Central Bank (ECB) continues to buy government bonds and thus keeps their yields artificially low. However, it is also clear that the probability that interest rates will be higher in two, three or five years than today is high. Consumers whose building loans are about to expire and who do not want to take any risks should therefore start to think about follow-up financing.

Home builders with a loan that is older than ten years are in a particularly convenient position. The special right of termination grants them free termination – even if a longer term was agreed at that time. Ten years ago, the interest rate was significantly higher than today, so debt restructuring is almost always worthwhile. Follow-up financing is also a good opportunity to adjust the monthly rate to the financial situation in the coming years. If you expect to lose income due to the coronavirus pandemic, you can reduce your monthly burden. “Alternatively, owners continue to pay their current installment and thus automatically increase the repayment, which in turn reduces the term of their loan,” explains Stephan Scharfenorth, managing director of the financial services provider

Forward loan with pitfalls

Consumers whose loans are not subject to the special right of termination can also terminate before the deadline. However, most banks require a so-called prepayment penalty, which not infrequently eats up the interest advantage. Building finance expert Scharfenorth therefore advises on so-called forward loans. With this special variant of follow-up financing, property owners can secure the current interest rate for up to five years. “Forward loans offer borrowers enormous planning security,” explains Scharfenorth.

However, lenders also have to pay for this security. Owners should therefore calculate whether the savings are not canceled out by the interest mark-up. If you need a follow-up loan in 24 months, you can calculate an average of 0.28 percent interest surcharge, studies by the financial advice FMH show. With a lead time of 36 months, it is 0.48 percent. The longest lead time (60 months) costs 0.88 percent more on average.

In addition to the higher fees, forward loans have other pitfalls: If the interest rate remains unchanged, the borrower pays in comparison to regular follow-up financing. With an interest surcharge of 0.88 percent on the current average base rate of 0.64 percent, the conclusion of a forward loan only pays off if the debit interest rates in 2025 are 1.52 percent or more. If the interest rate is lower, the forward loan was bad business, the FMH experts calculate. Consumers must therefore carefully consider whether the interest rate and planning security is worth this risk.

Real estate compass

Current property prices and detailed maps for all residential areas in Germany can be found in the Real Estate Compass:

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