Property financing: Finding the right follow-on financing
Construction interest rates are still low, and this is a welcome development not only to potential buyers but also to owners – and not just when the term of their loan is about to end. Well-chosen follow-on financing means financial security.
When it comes to arranging for their follow-on financing, the willingness of property owners is relatively high – not every financial topic is so self-evident for consumers. Studies show that on average, more than one-half of those surveyed begin looking for follow-on financing six months before the end of their current loan. But many consumers are faced with several open questions in order to properly implement this important project. By contrast, others hastily conclude a new loan. That is not always the best decision.
Also with follow-on financing, comparison is the key. Deciding too quickly can cost you hard cash.
In general, what do you need to pay attention to?
Look at all costs.
The best thing is to start looking for follow-on financing 12 months prior to the end of the interest rate lock-in period – and to compare offers. With regard to terms and conditions, the effective interest rate is decisive, as are options to make unscheduled repayments and change the repayment rate. When switching to a different lender, you should also calculate the costs that may be incurred to reassign and reconvey the collateral. An example: A land charge of EUR 100,000 costs nearly EUR 200. Also take into consideration any bank fees for calculating the prepayment penalty. Depending on the lender, other costs may be charged, such as EUR 50 to 150 for escrow management. But in general, it may be worth it to switch lenders, since on whole the lower interest rate will offset these expenses.
Lock in the interest rate for as long as possible.
When deciding on a follow-on loan, the same basic rules still apply as for the decision on the original loan. For instance, it’s best to get the longest possible interest-rate lock-in, particularly because interest rates are currently so low. A good guideline at the moment is 10 to 15 years. The background: If interest rates change on the capital markets, this can promptly make it more expensive to borrow money. For example, for a loan balance of EUR 200,000, an increase in the interest rate by just one percentage point would mean an additional EUR 2,000 per year in interest costs, or about EUR 170 more per month.
In general, in view of the current level of interest rates, it is advisable that repayment be feasible for the customer in the long term. Nevertheless, the repayment rate should be at least 2% in order to ensure that the debt is paid down quickly. Also: Because interest rates are so low, many lenders are now demanding minimum repayment rates of more than 2%.
Secure today’s top conditions for later
If financing still has a number of years to run, a so-called “forward loan” may be appropriate, where the current interest rate can be secured for up to five years in advance. The bank reserves the contract for the borrower for this period without any loan or loan-commitment interest being charged. The borrower normally pays the price for this via a small interest-rate premium. Note: If you decide in favour of a forward loan, you are still bound by your contract and the terms and conditions agreed to in it. MLP advisors can also provide you with valuable assistance in making this decision and properly calculate the corresponding offers. If you want to do some more research on your own for now, make sure to check your mortgage options with or free Mortgage Calculator.