Building loan interest – effective interest, debit interest and fixed interest

Building loan rates are an important benchmark that borrowers should look at closely for their real estate project.

They provide crucial information about how high the costs of real estate financing will ultimately be.

For this, however, not only the debit interest may be compared – the so-called effective interest is much more meaningful.

Another point that needs to be carefully considered with regard to mortgage lending rates is the length of the rate fixation phase – how long do you pay off the loan at a specific rate set by the bank?

Building loan rates are synonymous with borrowing rates and effective rates

Building loan rates are synonymous with borrowing rates and effective rates

The bank, as the lender, demands additional building loan interest on the borrowed money. This can be seen as a consideration. A borrowing rate is set on the borrowed money that the borrower has to repay, which must be paid accordingly in the form of the debit interest. The borrowing rate only relates to the pure loan amount for the property.

The APR, on the other hand, takes into account the possible additional fees that may be incurred on a loan. The effective interest rate includes the target interest rate and the additional fees.

  • The APR is much better for comparing the different loan offers than the debit. The effective interest rate is the decisive factor in building loan rates.

The additional costs under the effective interest rate include, for example, appraisal fees, commitment interest, partial payment surcharges, prepayment penalties and account management fees. According to the price information regulation, credit institutions are forced to make the effective interest rate in connection with the construction loan interest transparent.

But caution is also required here. There are costs – such as account management fees – that are not included in the effective interest. As a further factor in the credit comparison, the calculated remaining debt due after the fixed interest period should always be compared. The higher the remaining debt, the more expensive the loan.

Building loan interest, which interest rate fixing phase makes sense?

Building loan interest, which interest rate fixing phase makes sense?

One point in relation to the construction loan interest is particularly important for the borrower: How long should you be committed to the borrowing rate at best – five, ten or even 15 years?

In times of very low interest rates, the answer seems simple: as long as possible. Conversely, when interest rates are high, the mortgage interest rate should be kept as short as possible.

You could roughly say that the rate fixation depends on three factors:

  • the current interest rate
  • the future interest level
  • the security needs of the borrower.
  • When banks calculate building loans, they usually estimate the loan to run for 30 years. The borrower therefore pays off the loan within 30 years. The interest rate changes depending on the agreement with the bank after a certain time. After this certain time, so-called follow-up financing is usually required.

Building loan interest is only tax deductible to a limited extent

Building loan interest is only tax deductible to a limited extent

In Germany, building loan interest is only tax-deductible on very specific terms – namely only if the property is rented or sold. In such a case, the interest can be deducted from the tax as advertising costs by renting and leasing.

However, only interest on loans that can secure the landlord of a property the income he obtains from renting can be deducted – for example, interest on a building loan that was taken out to renovate a building so that the property can continue to be expanded.

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