Annuity loan for construction financing

In Germany, most property buyers opt for an annuity loan to fulfil their dream of owning their own home. Finally no more rent to pay, enough space for children and family and more freedom - all those who want to buy a house or a condominium dream of this and more. However, very few property buyers have the necessary euros to pay for their desired property out of their own pocket straight away. Home construction financing with an annuity loan offers the solution.

HOW DOES THE LOAN WORK?

CONSTANT RATE LEVEL

As part of an annuity loan, property buyers always pay constant instalments over an agreed term. These instalments are made up of two components: the interest and the repayment. The former is the amount that the borrower pays in return for the bank lending him the money for the mortgage. The amortisation, on the other hand, represents the repayment of the debt. The ratio of the two changes with each year.

REPAYMENT INSTALMENT IS FIXED

When the contract is concluded, an interest rate is usually agreed that is fixed for a certain term in years. An initial monthly repayment instalment is also set. The property buyer then pays regular, constant instalments. The amortisation gradually reduces the remaining debt. As interest only has to be paid on this amount, the interest portion decreases while the amortisation portion increases over time.

AMOUNT OF THE INTEREST RATE

How high banks charge interest depends, among other things, on the equity. This is the amount that the property buyer contributes to the purchase price. The reason: the higher the equity, the lower the risk that the borrower will default. The bank has to make fewer provisions for the worst-case scenario, which leads to a more favourable interest rate. Of course, the interest rate trend on the capital market and individual factors affecting the borrower also influence the interest rate.

What are the disadvantages and advantages of this form of home construction financing?

Advantages of annuity loans

Why do so many property buyers and builders opt for an annuity loan to finance their building project? The advantages are obvious: firstly, this type of loan offers a high degree of planning security, as borrowers know exactly how much money they have to pay to the bank each month. Furthermore, a relatively fast amortisation is achieved as the repayment portion increases steadily. In addition, the interest burden falls with each monthly instalment and the residual debt decreases.

DISADVANTAGE OF ANNUITY LOANS

However, an annuity loan also has some disadvantages. The fixed interest rate with a fixed interest rate is an advantage, as it makes it easier to plan. However, if interest rates fall, the borrower is still tied to the old, expensive interest rate. Another disadvantage, namely the low flexibility, also plays a role here. It is often not possible to make any changes to the contract during the term. It is therefore not possible to reduce or increase the instalments as a percentage. In order to remain flexible, borrowers should therefore contractually agree special repayments. Furthermore, the loan cannot usually be cancelled during the fixed interest period. It is therefore not possible to switch to a more favourable form of mortgage. However, there is a legal provision that allows the annuity loan to be cancelled without notice. If ten years have passed since the loan amount was paid out in full, borrowers have the option of cancelling the contract subject to a six-month notice period. The good thing about this is that in this case not a single euro of early repayment penalty has to be paid. Borrowers otherwise have to pay this amount to the bank if they redeem a loan prematurely.

WOULD YOU LIKE TO FIND OUT MORE ABOUT THE TOPIC OF "HOUSE CONSTRUCTION FINANCING"?

The anwalt.org guide will tell you, among other things, how a home loan and savings contract works. You will also find a short glossary of the most important terms that you should know when planning financing.

A text from the Berufsverband der Rechtsjournalisten e.V.

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