Commitment interest for a construction loan
Commitment interest in construction financing
Anyone who signs a construction financing loan is confronted with the question of the commitment interest free period. The grace period is the period during which the total amount of the loan must be disbursed without the bank charging additional interest. Additional interest because you don't call the total loan on time is a nuisance for builders and property buyers. The problem: a construction loan is earmarked for a specific purpose. This means that you can't just have the entire loan amount transferred to you. Parts of the loan amount are only transferred when corresponding invoices for construction phases and trades are available or until, for example, the purchase agreement for an existing property or condominium is actually signed by all parties, which is especially important when a community of heirs sells a property. If the disbursement margins specified in the construction financing loan are exceeded, banks charge additional interest for the delay. And this can be expensive, but can also be avoided.
Commitment interest is a kind of "parking fee"
Commitment interest is compensation for the bank that misses out on interest payments due to extended deadlines. Because the interest charged by the bank, which is fixed as part of the construction loan, is calculated only on the amount that is actually paid off by a certain date. This means that for term loans – such as. B. an annuity loan – would end up with fewer interest payments as calculated.
How to avoid commitment interest?
Avoiding these additional costs is not that difficult at all. In order to avoid that even the smallest delays are subject to commitment interest, there is the contractual module "commitment interest free period". Not only must the borrower be aware of this possibility, but in some cases he must negotiate it with the lending bank before signing the contract.
The time spans of the provision interest-free periods are different: from one month up to one year, in few cases also 15 months – are offered on the part of banks. These times must be fixed in the construction financing loan agreement. It is always possible to individually negotiate an extension, if one z. B. knows from the beginning that the new building will take longer than the offered standard of the time without interest, because for example one wants to bring in own contribution and one must plan therefore longer-term. That increases possibly the interest rate offered then on the part of the bank, however, can be far more favorable than if one falls into the "commitment interest trap. Also important to know: The granted periods until the final disbursement of the entire loan amount already starts with the conclusion of the contract.
Also possible: use equity only later
In construction financing loans is also regulated in which order debt and equity is to be used. It is usual to use the equity first, before the often piecemeal loan amount is disbursed. If one may use however first this outside capital, one can cushion so possible delays with the then later used own funds. In this way, one can also avoid the expensive commitment interest rates. That's why, especially for new buildings, it's important to negotiate not only the provision-interest-free period but also the exact definition of when debt and equity are to be used. Therefore, even the most favorable interest rate offered may not be the best one if the period of time during which interest is not charged is too short. This is because commitment interest can quickly nullify the interest advantage of the supposedly most favorable interest rate.
Making the most of the interest-free period for follow-up financing
Many banks offer default provisioning interest-free period of 12 months offer. One can also use this standard for follow-up financing. If the interest rate is particularly favorable one year before the end of the initial financing, it is already possible to secure it without having to take out a more expensive forward loan. Forward loans are always an option when an interest rate turnaround is imminent and you want to secure the current favorable interest rates two or three years before the initial financing expires. In any case, follow-on financing that takes full advantage of the full period of availability-interest-free time offered or negotiated-is the cheaper option. The same applies to forward loans as to follow-up financing with a lead time: once the loan agreement with a lead time option has been signed, it is no longer possible to withdraw from it. Otherwise, a non-acceptance fee will be due to the bank.
Specialized, bank-independent construction financing brokers such as Accedo AG can help you optimally with questions about follow-up financing. We not only know the daily offers of over 400 banks, but we also know which bank offers the longest possible interest-free periods. We also negotiate customized financing for you with maximum flexibility. This then includes the questions about the highest possible and free unscheduled repayment options or rate, repayment and interest rate adjustments during the contract period. This way, your construction financing is tailor-made, flexible, favorable and safe. It's not the most favorable interest rate offered that counts, but rather the overall package. This advice is always free of charge at Accedo AG – regardless of whether you ultimately conclude your construction financing loan with Accedo AG or not.