Meaning of the term "construction financing"

Having your own home is a desirable goal for many people and is also ideal as a form of retirement provision. To realize the dream of a private house or a condominium, loans are required in most cases. These loans are also referred to as construction financing.

Construction financing with a fixed purpose

Construction financing refers to loans that have a fixed purpose and can be used specifically for building a house, for renovation and modernization work, or for the purchase of a condominium.

Many banks require explicit proof of the use of construction funds after the loan amount has been paid out in order to detect possible misuse. The use of funds can be demonstrated, among other things, by presenting tradesmen invoices, but also by the architect's construction progress report.

The specifics of construction financing

Compared to installment loans, construction financing has some specific features: these loans are generally granted with higher loan amounts, and many banks also require a minimum loan amount of €20,000–30,000.

It is also possible to take out construction loans with longer terms. In some cases these loans can have terms of up to 30 years. This has the advantage that only a low monthly burden is due, even if higher loan amounts are agreed.

Construction financing is often granted as an annuity loan. In these loans the interest rate is fixed for the period of the interest-rate lock (which can be up to 20 years). After this fixed-rate period, the conditions are renegotiated with the bank. Many builders and borrowers opt for long fixed-rate terms, as this can significantly reduce the risk of interest rate changes.

Construction financing and collateral

With construction financing, a security in the form of mortgage liens is usually agreed. In practice, the Grundschuld has established itself as the credit security in this context, since it remains in place even after repayment of the loan and can thus be used for future loans.

The Grundschuld, which is entered in the Grundbuch, enables the bank to sell the property should the borrower no longer be able to pay the monthly installments or become insolvent. However, if installments are paid regularly, the bank will not assert claims from the Grundschuld and will delete it after the loan has been fully repaid.

Applying for construction financing

Today, construction financing can be applied for both at a local branch and online. In many cases, applying online can even result in interest advantages.
Since banks must carry out some checks before approving the loan, the submission of various documents is necessary. These include, on the one hand, proof of income; in some cases an income tax assessment notice is also required.

Furthermore, banks require documents relating to the mortgaged property (Beleihungsobjekt), i.e. the house or the condominium. These are needed to determine the value of the property and thus to substantiate the value of the Grundschuld. If all documents are submitted in full, a loan decision for the construction financing can often be made within a few days.