Residual debt – the most important value of construction financing

Residual debt poses the greatest risk in construction financing

Sensationally favorable are the current offers of construction financing providers. 0.75 percent interest for a 10-year fixed-rate period. This is just 350,- Euro monthly burden for a 250.000,- Euro building loan. If you do not close quickly there, it's your own fault. Really? As fabulously cheap as the offer seems, it is risky at second glance. Repayment? Mini. Residual debt extremely high. Who concerns itself today with a Baufinanzierung, should concern itself particularly with the value of the remaining debt, which must be financed further after expiration of the Erstvertrags with a connection financing. Particular caution is required, because at the end there is the threat of insolvency (you want to calculate residual debt? Use this calculator).

Residual debt and the risk that interest rates will rise

Naturally these dream interest rates are tempting in a time, in which 4 of 5 Germans have the dream of the own home and other plant forms are either risky or interest-poor. So the number of real estate loans is rising rapidly. In 2015, German citizens borrowed approx. 1.3 trillion euros for the purchase or construction of real estate. Especially in metropolitan areas the boom is enormous, because here the rents explode. And a financing for 350, – in the month is far more favorable than the rent, which are to be paid up-to-date.

But the monthly burden is a deceptive value. It is much more important how quickly the loan can be repaid. Here it is advisable to make as much repayment as possible in the month and for it also monthly loads of 1.000, – Euro or more to put up with. This 1.000, – euros correspond to the rent, which is currently required for well-equipped 3-room apartments in metropolitan areas.

Why? Because in the end it is always the question of the residual debt. If you take the bait offer of 0.75 percent interest fixed over 10 years and are happy about the 350, – Euro monthly mini-charge, then the awakening after expiration will be terrible. Because after these 10 years you have just ca. 30.000,- Euro repaid. The residual debt after these 10 years is still a proud 120.000,- Euro. And what if then the interest rates have risen again?

The probability of rising interest rates in the next 10 years is very high

If you consider that construction interest rates of 5 percent were still considered rather low 10 years ago, then you can see how likely it is that interest rates will approach this value again in 10 years' time. The current mini-interest phase has already lasted 7 years. Actually a disaster for banks and savers. But not for construction financiers. That is why there are currently serious discussions at central bank level about raising key interest rates in the medium term. And if this index rises, the construction financing will certainly follow suit and thus become more expensive.

If interest rates rise, the interest rate for the follow-up financing also becomes much more expensive. Then it can avenge itself not to have used the maximum amount in the low-interest phase for the repayment and thus for the debt dismantling. Who then 120.000 Eure new fininanzieren and in addition because of the new legislation (residential real estate credit guideline) up to the entrance into the age of retirement the building financing to have completely redeemed must, can fast with monthly loads of 2.000,- Euro and more can be faced.

If you also know that most building loans are designed for 26 years – in urban centers even up to 40 years – term, you will quickly realize the danger of an increase in interest rates. An interest rate increase of just 1 percent means an extension of the term of 7 years until freedom from debt, assuming repayment rates remain the same.

Residual debt trap: What can you do about it?

Strictly speaking, there is one option in each case; one for those who have already taken out too favorable 10-year financing and one for new financiers:

  1. If you already have a short-term mortgage contract with a 1 percent repayment rate that is too favorable, the only thing that helps is to get out as quickly as possible; without having to pay a lot of money to the bank for this termination (keyword: prepayment penalty), you can take out a forward loan (up to 3 years before the initial contract expires – in special cases up to 4 years) that secures the favorable interest rates for the follow-up financing. In this forward loan, however, you can then set the repayment as high as possible and the term as long as possible (until you are debt-free, if possible).
  2. With a new contract, you should start anyway with the highest possible repayment (5 percent and more) and a long term, so as not to run into the trap of residual debt.

Current figures indicate that the average purchase price in Germany is ca. 330.000 euros per property; in high-price regions such as Munich at approx. 500.000,- Euro. Currently, an average of 15 years fixed interest rate with 3 percent repayment is chosen. In equity, the buyer brings an average of 80.000,- Euro with. So on average 250.000,- financed by construction.

The current average values for construction financing

For 15 years fixed interest one pays at present on the average 1.3 per cent. This results in monthly installments of approx. 950,- Euro per month. The remaining debt after expiry will then be approx. 130.000,- Euro. But if in 15 years the interest rates have risen to nevertheless still favorable 4 percent, the term until you are free of debt, if you still want to pay 950, – monthly extends to approx. 30 years. But if you then have to be debt free after 25 years, you already pay 350,- Euro more per month resp. 1.300,- Euro.

This is what you should consider if you don't want to run up residual debt. Therefore, we recommend contacting a bank-independent and reputable construction financing broker who can offer you secure financing tailored to your life planning. And always get a calculation of the residual debt before you decide. The residual debt ultimately decides whether you take a calculable or incalculable risk.

Construction financing plan: First calculate yourself and then to the lender to be able to negotiate perfectly

Our tip: Plan construction financing before you go to the bank or contact a construction loan broker. If you plan your construction financing in advance, you can negotiate with the lender on an equal footing when it comes to the details. In the following, we would like to give you recommendations and help so that you can quickly get to your goal and achieve the dream of owning your own ..

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