You need to know what a building loan can be used for. It can also be used for modernization and renovation projects.
What can a construction loan be used for?? Short answer: to build. Because certainly the construction loan is name typical for the construction of a house, but a construction loan can also be used for other purposes around the construction direction. This article takes a look at that and explains for which projects construction financing can be used.
What is a construction loan?
The construction loan is intended for financing a plot of land, building a house or buying a house. It is strictly related to real estate, although the definition is not so narrow that the word 'construction' in the loan name is elementary. An overview:
- Purchase of land – the money from a construction loan can be used to purchase a suitable building plot. The purchase of land and the construction of a house often go hand in hand in terms of credit.
- Materials – the materials needed for the construction of the house can be financed through the construction loan. In this regard, there is already a small difference, because if you purchase an existing building through construction financing and want to renovate or modernize it, you may also finance the materials and labor costs needed for this through the construction loan.
- Ancillary construction costs – ancillary construction costs and the ancillary costs of buying a house are also financed through the construction loan.
- Construction/renovation – the actual construction of a house or the renovation of a purchased existing property is covered by the construction loan.
In principle, a construction loan requires collateral in comparison to a normal installment loan. The house or property itself now represents security. The construction loan is registered either as a mortgage or as a land charge in the land register, so that the bank receives a lien.
What exactly can it be used for?
If you want to arrange your own real estate loan at a favorable rate, you should calculate the offers in advance and compare them carefully.
As a rule, you take out the construction loan to pay for the entire project house. For construction financing generally refers to the purchase of a residential property, but it is not specified that a house construction is necessary. Likewise, construction financing does not focus purely on houses. The construction loan can also be used to buy a condominium. Likewise, it is possible to buy into a project and build a condominium. The only important thing is that you meet the following three criteria for a home loan.
The money from the construction financing is used purely for house-related purposes. Depending on the lender, there are strict rules here. For example, money for construction projects is often transferred in batches, i.E. Always after the completion of a construction phase. This way has advantages, because if the construction company becomes insolvent, the entire financing sum is not included in the insolvency estate. Depending on the financing, the loan amount can also be used to cover furnishing costs in addition to the pure construction and acquisition costs. For example, the inclusion of a kitchen can be negotiated.
Modernization can be financed only after buying a house or apartment through construction financing. If money remains from the construction loan, individual work can also be paid from it. However, it is not possible to subsequently modernize a property that has already been purchased by means of a construction loan. For cost reasons, this is not sensible anyway, because modernization loans are significantly cheaper and do not require entry in the land register.
Regardless of whether you are building or buying: measures that count as energy-efficient renovations can be paid for through construction financing. But again, subsequent work must be possible via another form of financing.
Attention: in principle, of course, it is possible to add a sum to a building loan already obtained, so that further work and modernization can take place. However, this must be well considered. Since construction financing leaves a mortgage or land charge in the land register, subsequent changes to the loan amount must be newly deposited in the land register. Since changes to the land register can only be made upon request and must be performed by a notary, new costs would arise.
How to keep interest rates low?
Home loans do have humane interest rates in comparison, however customers nonetheless want interest rates to be as low as they can go. At present, prospective homeowners have good opportunities, as interest rates are so low due to the low interest rate policy that there is hardly any downward room for maneuver. But therein lies one of the cruxes:
- Interest rate lock-in – if interest rates are low, you need a long lock-in period; if interest rates are high, you need a short one. The fixed interest rate means that no upward adjustment can be made within this period.
- Equity capital – a solid equity capital of 10 – 20 percent minimum is to be ensured. The higher the equity, the lower the loan can be. This also lowers the interest costs, especially since banks often set lower interest rates when equity is available.
- Mortgaging – the mortgaging of the house is considered as security, but the amount must not be exhausted. The fact is that the mortgage must not exceed the value of the house. In addition, homeowners must pay attention to a good repayment rate, because only it guarantees the repayment of the loan. If the interest costs decrease over time, the rate remains the same and repays more each month. However, if you start with a repayment rate of one percent, you will hardly pay anything off within ten years and will owe the bank almost as much after the fixed-interest period as you did at the beginning – so the home's loan-to-value ratio will hardly drop either.
It is important to always compare the offers for construction financing. On the internet, comparison sites also access construction loans and offer interested parties a simple way to view and compare options. So well informed can now also look at the house bank or building society for a financing offer.
Conclusion – the construction loan is earmarked for a specific purpose
A construction loan is for the construction or purchase of a property. At the same time, it allows to cover work that is closely related to the purchase or construction. Almost every construction financing is registered in the land register, so that the lender acquires a lien on the house, should there be a default on the loan installments. For this reason it is important to calculate the construction financing well and to pay attention to a solid equity ratio. It happens more often than some believe that newly built or purchased houses go into foreclosure a few years after financing, because the construction financing was not planned correctly in the beginning.