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Building interest: This is what you should pay attention to when taking out a real estate loan

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Building interest: This is what you should pay attention to when taking out a real estate loan

The dream of owning a home exists for many people: You can find out what you need to know about building interest here. picture alliance / Westend61 | HalfPoint

According to the real estate financing company Dr. Small building interest rates are currently between 3 and 4 percent.

Interest rates are influenced by factors such as monetary policy, inflation rates and the economy.

In order to find cheap building interest rates, you should compare different offers and pay attention to factors such as term and repayment options.

Building interest plays an important role for anyone who wants to purchase or build a property. The level of interest influences the cost of your property purchase. You can find out here what building interest actually is, where it currently stands and how to find cheap offers.

What is building interest?

Building interest is the interest you pay to the bank when you borrow money from them to build or buy a house. They therefore represent the price that the borrower has to pay for the use of the capital in order to realize his project.

What determines the building interest rate?

The building interest rates are determined by various factors, including the monetary policy of the central banks, the inflation rate, the economy, the development of the capital markets and the general level of interest rates. The central banks set key interest rates, which influence short-term interest rates and thus also building interest rates. In addition, supply and demand for real estate loans play a role.

Where are the building interest rates currently?

Building interest rates have currently fallen again since the end of October 2023. An evaluation by Dr. shows that they have leveled off at a level of between three and four percent. Small. A trend that could continue this year. “I assume that we will have a sideways movement in building interest rates in the first half of 2024. Even if fluctuations do occur, we will see them up by a maximum of half a percentage point and down around the current 3.5 percent for a 10-year fixed interest rate,” says Michael Neumann, interest rate expert at Dr. Small.

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Development of building interest rates since January 2022. Dr. Small

Nevertheless, the amount of building interest varies depending on the country, economic situation and other factors. It is advisable to regularly check the current interest rates to get the best conditions. During periods of economic stability and low inflation, building interest rates tend to be low, while during periods of economic uncertainty or high inflation they may tend to rise.

This is how the building interest rate affects the costs of real estate financing

Building interest rates have a major impact on the costs of real estate financing. Assume you want to buy a property worth 400,000 euros and the current best interest rate is 2.97 percent (as of February 2024). The buyer will then incur interest costs of 106,012 euros. The monthly rate in this case is 1,657 euros. For comparison: Compared to the interest rate at the beginning of December 2023 of 3.29 percent, house or apartment buyers save 11,267 euros in interest costs with a monthly rate that is 106 euros lower.

Example calculation for real estate financing

Example 1Example 2Loan amount400,000 euros400,000 eurosInterest rate pa2.97 percent3.29 percentMonthly rate1,657 euros1,763 eurosInterest costs106,012 euros117,279 eurosSource: Check 24, as of February 22, 2024

A tip: the financial company Dr. Klein offers a calculatorwith which you can calculate the costs of your real estate financing using the current building interest rate.

Where can I find the cheapest building interest?

In order to find cheap building interest rates, it is advisable to compare different offers from banks, credit institutions and financial service providers. This can be done online via comparison portals or directly at the local banks. In addition, independent financial advisors can help you find the best interest rate. In addition to the interest rate, it is important to pay attention to other factors such as term, repayment options and possible additional costs.

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5 tips for cheaper building interest conditions

Bring in equity: The more equity you bring in when buying a house, the lower the loan you need to take out and the lower the interest rate and the total interest costs you have to pay. Equity includes not only the money that is in the bank, but also existing real estate and land, securities and shares or even personal contributions.

Contribute your own contribution: To save money, you can do some work on or in the house yourself. This is called personal contribution. If you do that, it will be considered equity. This means you need less money from the bank and also pay less building interest. But be careful: only do work yourself that you are good at and where not much can go wrong.

Choose a suitable fixed interest rate: The fixed interest rate tells you how long you set the current interest rate for your loan. In short: the longer the fixed interest rate, the longer you have the same interest rate. If you really want to save on interest, you can choose a short fixed interest rate – usually 5 years. Short bonds are cheaper because the banks can better assess the interest rate risk during this time. But please note: A long fixed interest rate makes financial planning safer for you.

The correct repayment: Banks like it when customers have their finances well under control and can pay on time. This reduces the risk for the bank that customers will not be able to repay their loans. In addition to other factors such as interest rates, how quickly you can repay the loan is also important. This is called redemption. The repayment determines how high the monthly payment is. It shouldn’t be too small and not too big. A small repayment means a low monthly payment, but you will pay off your loan for a very long time. The longer it takes you to pay off your loan, the higher the risk that something unexpected will happen. This can mean that you have to pay higher building interest. A larger repayment usually means a higher monthly payment. But this means you pay less interest overall and repay the loan more quickly.

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Check state funding: Funding in the form of, for example a KfW loan reduce the overall interest rate on building financing. Such funding is often supported by the state. If you are eligible, you could use this money as a repayment subsidy, i.e. pay off your loan faster through special repayments. Or you can save it up so that you can then contribute it as equity to the follow-up financing and thus save interest.

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