Constant mortgage loan – how it works

Constant loans are a special form of building society pre-financing. The main reason for taking out a constant loan is that the vast majority of real estate financiers need the help of the banks to buy a property, which provides the necessary loans to pay the purchase price put. In this financing, home savings contracts are also often included, because they offer the decisive advantage that through the use of the future home savings loan, at least part of the amount to be financed is obtained through the low-interest home savings loan. However, this is only possible if the home savings contract has been saved at least up to half and is ready for allocation. But this is not always possible, because in many cases the time of buying a suitable property does not come in line with the allocation of the home savings contract, so that the mortgage lender is now dependent on home savings pre-financing.

In this case, the bank or building society lends the borrower a so-called pre-financing loan, in the amount of the total amount of the building loan. The future home loan is also included in this home savings sum. The interest rate calculated by the banks for the pre-financing loan is the same as the building loan, in return the building loan contract is assigned by the borrower to the bank or building society as security. Within the home savings pre-financing, the loan amount, home savings sum and the monthly payments are coordinated so that the borrower pays a constant loan rate over the entire term.

If a contract is concluded for a constant loan, the amount required for the construction project is paid out in full. Along with this payment, an immediate deposit is made in a building society contract. This immediate deposit takes up 50 percent of the financing requirement and is also financed. At the latest in the eighth year, the home savings contract is ready for allocation, within this period the borrower pays a fixed monthly rate. After the allocation has been made, usually in the ninth year, the loan can then be partially repaid with the home savings credit, while the outstanding amount continues to run as a home loan. The monthly rate remains the same during this period.

This financing model results in comparatively very low interest rates over the entire term of the financing, and there is also no interest rate risk over the selected 10 or 15 years. At the same time, the borrower has the option of making special repayments from the eighth year after his home savings contract is ready for allocation. A combination of constant loans and variable loan parts is also possible. This option is suitable for all those who are flexible enough to make special repayments in the first few years. The home savings pre-financing thus offers a good opportunity to incorporate the home savings contract into the real estate financing before the actual allocation.

How Constant Loans Work

How Constant Loans Work

In the case of a constant loan, the monthly installment until the home savings contract is allocated is made up of the home savings amount and the loan interest. If the Bauspar contract is then allocated, the loan is repaid with the credit from the Bauspar contract. The remaining credit, however, continues to run as a home loan. As a result, nothing will change in the monthly installment you are used to, but it is now used for interest and the repayment of the home loan. With this type of loan, the current interest conditions – and thus also the monthly installment – can be fixed until the loan is fully repaid, so that the borrower does not have to worry about an interest rate increase.

Borrowers who opt for a normal annuity or full repayment loan can have the interest fixed for 15 or 20 years, for example. Likewise, the repayment is adjusted so that the loan is then fully, ie 100 percent, repaid at the end of its interest payment. If, on the other hand, a classic constant loan has been taken out, the borrower only pays the interest. A home savings contract must then be concluded in the same amount. As a rule, this is then saved to 40 percent of the home savings sum until it is then allocated. With this allocation, the borrower then receives his paid-up credit from the building society, including interest and home loan. The borrower then repays the loan amount originally taken out in one go. Only then will the home loan be paid off.

Both the interest and the monthly payments into the home savings contract are calculated in such a way that they remain the same over the entire term, until the loan is fully repaid and regardless of developments in the interest market. It is crucial here, however, that the lender, for example the building society, also promises the borrower a fixed rate over a fixed total term for a certain loan amount. Anyone who does not rely on a comparison of conditions quickly gets sidelined, because some banks require a so-called partial payment surcharge, which can amount to up to one percent on the agreed nominal interest rate.

Some credit institutions and building societies offer two different models in this context. In model 1, the borrower signs both the loan and the home loan contract in the same amount, but only pays the interest on the loan. In return, the home savings contract is saved up high, so that it can be allocated after a ten-year term, for example. Thus, the monthly installment consists of the home savings amount and loan interest. If the home savings contract is then allocated, the home savings account plus the interest is paid to partially repay the home savings loan. The remaining credit then continues as a home loan, although the monthly rate does not change here either. However, the monthly installment and interest rate on the home loan is now used. All in all, nothing changed in the monthly rate apart from the ratio of interest and repayment during the entire term.

In the case of model 2, on the other hand, the borrower also concludes two contracts, although part of the loan now flows into the home savings contract as immediate savings. From this point onwards, the borrower only pays the interest on his constant loan, but at the same time the home savings contract is also saved, albeit at a relatively low rate. If the home savings contract is then allocated again, the pre-financed loan is replaced. Depending on the contract, the building society contract can also be allocated differently, so that different and uncomplicated special repayment options can be used. Interested parties can secure such a loan from as little as $ 25,000.

A comparison is also very important for constant loans. Especially in times of low interest rates, this financing option can be a sensible safeguard against rising interest rates. However, with this variant it should also be noted that early termination by the borrower is very expensive in most cases, since no repayments are made in the first few years. With this loan variant, mortgages of up to approx. 72 percent of the property value are possible for predominantly owner-occupied, non-commercial real estate.

The pros and cons

The pros and cons

Home finance through a constant loan is always made using the combination of advance loan and home loan contract. The property acquired is therefore initially financed through the advance loan without any repayment. This is the pre-financing phase. During this time, the equity capital and a corresponding savings contribution will initially flow into a home savings contract in monthly installments. In the first few years, the installment itself consisted exclusively of financing the loan interest and the home savings contributions. If the home savings contract is ready for allocation, the home savings credit then replaces the advance loan. The amount that now remains runs as a home loan. This phase is called the home loan loan phase. This has the advantage that the risk of rising interest rates is excluded for the entire term.

One of the most important criteria for a constant loan is independence from what is happening on the capital market. Another advantage lies in the fact that constant loans are granted within the first six months after the loan has been committed without any commitment interest. If the applicant is authorized to do so, a residential Riester grant can also be included in the building society contract. Advantages and disadvantages must, however, be adapted to the individual economic situation and the security needs of the borrower. It is therefore worth comparing this form of mortgage lending with other options.

However, constant loans do not only offer the advantages listed above. If pre-financing is paid out, the borrower is only obliged to pay the interest on the loan, whereas the actual repayment is only made with the home loan. In addition to the interest, there is also the actual savings contribution up to the actual allocation of the home savings contract. Another disadvantage arises from an early, sometimes necessary exit from this financing model. In this case, the borrower incurs enormously high costs because the allegedly constant interest rate only makes the loan attractive at first glance. Because what a building society should never: guarantee the time of allocation for a building society contract! This is prohibited by law alone.

In most cases, the valuation figures at the decisive point in time of replacement are therefore very far exceeded in most cases. This in turn also extends the time within the savings phase. It is not uncommon for savings contracts with terms of between 14 and 15 years to be saved until they are finally ready for allocation. And up to this point, not a single USD had been repaid within the actual amount of funding! The disadvantages are accordingly that constant loans are often more expensive than pure annuity loans – at least according to the current interest rate (as of 03.2011). In addition, there are the closing fees of 1 to 1.6 percent that are incurred when a home savings contract is concluded. So that building society contracts are ready for allocation faster because they have been replenished accordingly, most building societies do not award a building society contract with a loan volume of 100,000 USD with 100,000 USD, but 5 building society contracts with 20,000 USD each. The building society is always the winner here.

Many and proven (!) Many borrowers also receive the wrong tariff from their building society. This in turn can be expensive for the borrower. If the allocation of the home savings contract is then delayed, then expensive interim financing is necessary again. And this often means the simple end. Borrowers also receive the interest rate security mentioned with the constant loan as well as with an annuity loan. Because even with this form of financing, extremely flexible special repayments are possible. After 10 years, borrowers even have the option to repay 100 percent of their loan – and all at no additional cost. Another disadvantage is that the constant loan model – depending on the course of the interest rate – is many times more expensive than a normal annuity loan.

Furthermore, special repayments, as is usual with building societies, are possible at any time, so that the burden can be reduced during the term. Conversely, the disadvantages outweigh this, because precisely because a constant loan consists of both a loan and a building loan contract, this also automatically increases administrative expenses. The risk that the building society loan contract will not be ready for allocation on day X and that an expensive interim financing would then be due makes the whole thing extremely uncertain. At the same time, borrowers who opt for a constant loan are almost always extremely closely tied to the provider, so that a certain amount of flexibility, namely in the event of a change of provider, can only be mastered at high costs.

So if there are already correspondingly low interest rates within real estate financing, a constant loan is in no way worthwhile. Arguments such as constant expenses throughout the entire term and special repayments do not change this, because this is almost always possible with annuity loans nowadays. Builders should therefore not weigh themselves in false security with a constant loan, because the lack of transparency in particular almost always makes it impossible to compare offers. A comparison with annuity loans almost never comes about. Most of them have to put up with the fact that they fall for an expensive fake pack. In addition, most banks only work with a single building society, so that they are bound by the conditions there.

The Alternatives to Combi Loans

In addition to the combination loans, the classic annuity loans also offer constant installments. However, this must be contractually agreed with the bank until the end of the term. The same applies to Volltilger loans, which can also be used to settle installments up to debt free. If the borrower chooses comparatively high repayment shares with this form of financing, the banks even reward them with attractive interest discounts. That is why the following applies in particular to home finance: compare, compare and compare again. Because the constant monthly installments once agreed must always be paid by the borrower until debt relief. Conversely, this also means that the economic performance of the borrower must always be guaranteed. This is the only way to avoid financial bottlenecks. Avoid these pitfalls when you get information from financing experts.

How to avoid unfair offers

The main disadvantage of a constant loan is the fact that there are too many offers on the market that are unfortunately not entirely fair. Only rarely are these stumbling blocks discovered by the borrower. Most credit institutions also refrain from stating the “true” effective interest rate. The offered interest rates for an advance loan and for the future home loan are almost always lower, but on the other hand the costs of this model cannot be seen immediately. Because only very few banks are willing to give the borrower the so-called reference interest rate. If a home savings contract is then concluded, commissions accrue between 1.00 and 1.60 percent of the home savings sum. Conversely, the home saver receives only an extremely low interest rate for his deposits on the home savings contract, but in return, significantly higher interest rates have to be paid for the advance loan that is included in the home savings contract.

On the other hand, if the interest on the advance loan were normal, the far higher costs of this model would be apparent to every borrower, which is why no one would choose this financing model anymore. For this reason, the banks make financing attractive by offering the repayment-free loan in the savings phase well below the market interest rate. This model is then brought to the man in a way that is effective in advertising.

What many borrowers do not consider: In order to receive the total effective interest rate, not only the effective interest from the previous loan but also those from the home loan must be linked. But precisely this interest rate cannot be mentioned by the banks, because in this case the entire offer would become unattractive. The effective interest rate is often higher than that of a comparable 15-year annuity loan – the financing is therefore too expensive and inflexible. Example:

The effective interest rate mentioned by the banks is also often a matter of definition, because in most cases the borrowers are deliberately misled. Here is an example: A borrower needs 100,000 USD for real estate financing. He chooses a ten-year fixed interest rate with a two percent repayment. The borrower relies on the offer of two banks: the first gives an effective interest rate of 5.33 percent according to the PAngV (Price Notice / Price Disclosure Regulation), the second comes to an effective interest rate of 5.43 percent. The fact that the first bank must now be cheaper than the second can quickly prove to be a mistake. Let’s take the first bank and call it “bad bank”. It gives the borrower a nominal interest rate of 5.20 percent, the effective interest rate according to PAngV is as high as 5.33 percent.

In addition, the bad bank has ancillary costs, which result from estimated costs, commitment interest and partial payment surcharges, in the amount of 1,200 USD. This results in an actual effective interest rate of 5.51 percent. Not so with the Lite Bank, bank number two. This requires a higher nominal interest rate, namely 5.30 percent, compared to the bad bank, so that there is an increased effective interest rate according to PAngV of 5.43 percent. However, the Lite Bank does not incur any additional costs. Therefore, the borrower at this bank benefits from 5.43 percent actual effective interest.

Another important thing to know. All building societies are required by the price regulation to name the effective interest for the advance loan and for the later building loan. But be careful: in most cases, both interest rates are well below the interest rates for loans with a comparable fixed-term period. Therefore, financing interests must know the actual costs for this model, and this can only be seen in the so-called “true effective interest rate” or “” combined rate “. However, only very few building societies give this rate. In many cases, real estate financiers also have to determine when using their home loan contracts that it is not worth using the home loan because normal mortgage loans are much cheaper.

In all of these cases, the pre-financing of a building loan contract usually proves to be an expensive loss. Example:

What most borrowers cannot know: Both banks, savings banks and building societies only offer the combination of advance loan and building society contract as “always recommended” because the building owner avoids “… the risk of interest rate increases in follow-up financing.” The customer on the other hand, it was never calculated how high the interest rates would have to be in order for the home loan prefinancing to pay off in comparison to a normal mortgage loan. In our example case above, the financing for the home saver would only have paid off if the interest on the loan with a 10-year fixed interest rate was approx. Would have skyrocketed 12 percent effectively. An almost unthinkable case.

From this it can be seen that credit institutions only offer their borrowers advantages, however, information about disadvantages and the honest presentation of all costs is rarely provided. If the building society savings contract is not yet ready for allocation, it should be checked in advance whether an additional payment makes any sense in order to achieve rapid allocation maturity. Example:

The savings interest within the home savings contract is offset by a loan interest (home savings contract) of 4 percent. This results in a loss of interest for the financier: 2.5% per year! It should therefore always be ensured that the credit institutions do not fix their interest rate for the pre-financing loan “until a specific date”, but rather “until the home loan contract is allocated” (so-called fixed interest rate until allocation).

Who is a constant loan suitable for?

Who is a constant loan suitable for?

Basically, everyone should stay away from a constant loan. Although the credit institutions or building societies always advertise this type of financing as ideal, it is suggested to the borrower that he is extremely security-conscious. And that he can rely on absolute interest rate security. But this highly risky security has to be bought at an expensive price. Anyone who relies on interest rate security can also get this with a normal annuity loan, because extremely flexible special repayments are also possible here. Ten years after full payment, 100 percent is possible here, and the whole thing without any costs!

On the other hand, the constant loan is the ideal solution for security-conscious borrowers who want a high level of calculation security and who want to completely eliminate the risk of rising interest rates during the loan term through the interest rate guarantee. A constant loan is also suitable for borrowers with financing needs for new construction, purchase, modernization or renovation as well as for debt restructuring or follow-up financing. Especially security-oriented people need a fixed calculation size when they take out a loan that is to run for several decades. Because a fixed interest rate that has only run for 10 years is simply too short for them. In many cases, however, there is a fear that interest rates may rise after ten years and that the monthly charge may become unbearable.

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