The Construction Loan: Financing from Greenfield to Move-in

How the Building Overdraft Works

The construction loan is usually provided by the bank in the form of an overdraft facility. In contrast to a mortgage, you are not paid the full amount at once. Instead, the bank pays ongoing invoices from contractors, architects and suppliers directly via this account. The big advantage for you as the builder: interest is only charged on the amount actually used so far. With every invoice paid, the amount claimed and therefore the interest burden increases until the project is finished.

From Construction Loan to Final Mortgage

The phase of the construction loan is limited in time and ends when the building is completed.

• Consolidation: As soon as the final construction invoice is available and the house is ready for occupancy, the construction loan is converted into a regular mortgage. This process is called consolidation. You can decide whether you want to convert the loan into a fixed-rate mortgage, a SARON mortgage, or a mix of both models.
• Partial consolidation: For longer construction periods, it may make sense to convert parts of the amount used into a mortgage even during the construction phase to protect yourself against rising interest rates. However, this requires close coordination with the financing institution.

Cost Factors and Commitment Fees

In addition to the variable interest rate for the capital used, many banks charge what is known as a commitment fee. This fee is charged on the unused part of the credit limit. It compensates the bank for holding the funds for your construction project without being able to use them in the market. In your overall cost planning for the construction, you should absolutely factor in these "reservation costs," as they can unexpectedly increase financing costs in the event of construction delays.

Additionally, for a construction loan, banks require detailed monitoring by construction supervisors or confirmations from architects. Only when progress on the site is proven are further tranches released. This serves as security for the bank, but also ensures for you that no payments are made for services that have not yet been provided.

What Builders Should Look for When Choosing

A construction loan offers maximum flexibility, but is usually more expensive than a long-term mortgage. That’s why it is crucial to view the conditions for both the construction phase and the subsequent mortgage as a complete package. Some institutions offer combination products, where the interest rate for the later mortgage can already be fixed when breaking ground. This protects you from the risk that interest rates rise significantly during the one- to two-year construction phase and threaten affordability at the time of consolidation.

Advice & Support for Your Project

Are you planning a construction project and looking for suitable financing from the first sketch to the handover of the keys? We help you to minimize the costs for the building overdraft and to find the optimal time for consolidation. Take advantage of our free 15-minute check for a professional initial assessment of your project and find out how we can support you on a fee basis.