Secure a fixed interest rate with fixed interest rates
The interest rate at which you borrowed a building loan remains the same during the so-called debit rate fixation, also known as fixed interest rate. That means, regardless of whether the current building rates rise or fall: You pay the interest rate that you agreed upon when the contract was concluded.
The fixed interest rate can go from 5 to 30 years. Some banks now even offer maturities of 40 years.
Decision aids for the choice of fixed interest rates
When choosing the borrowing rate, it is important to weigh the factors of security and opportunity:
Security through a long fixed interest rate
A long fixed interest rate – that is, a fixed interest rate from 15 years of age – offers you planning security due to the constant borrowing rate: you will know the amount of the monthly mortgage payment for the next few years.
However, the following also applies: the longer the term, the higher the interest rate. Because the banks have this security paid in the form of an interest surcharge. Currently, a 15-year fixed interest rate costs around 0.4% more than a 10-year one. But you are not exposed to the risk of a rise in interest rates.
In times of low interest rates, we advise you to hold the borrowing rate for a longer period of time, as this way you can secure a low interest rate for a long period.
The opportunity that a short fixed interest rate offers
In times of high building interest rates, a short borrowing rate from 5 years has a clear advantage: There is a chance that after the interest rate has expired, the building rates will have dropped and you will be able to conclude cheaper follow-up financing. In addition, the borrowing rate that the bank charges for the loan is lower with a short term. So you pay less for your mortgage. However, it can be assumed that after a short period of fixed interest, the remaining debt is still very high and you therefore have to deal with a large amount with your follow-up financing. Unless you can use a high repayment or special repayments to repay the entire loan amount within the fixed interest rate.
Cancel the loan during the term
Under certain circumstances, you have the option of terminating your loan contract while the interest rate is fixed: If it has been 10 years since the building loan was used, you can get out of your contract free of charge after a period of 6 months. Free of charge means that you do not have to pay the so-called prepayment penalty, which is due in other circumstances. Namely, if you want to end the loan contract before the end of the 10 years. And that is only possible if your financial situation has changed significantly, so it is no longer possible for you to repay the building loan and you have to sell the property. You have this so-called “extraordinary right of termination” in the following situations:
Another reason is that the previous bank refused to allow you to extend the loan.
Do you know the difference between borrowing rate and effective rate?
When it comes to home financing, a distinction must be made between two interest rates, the borrowing rate and the effective rate. The difference between target and effective interest is comparable to the ratio of net to gross price. For example, VAT is not included in a net price. The gross price, on the other hand, contains all costs and thus determines the final price.
In this equation, the borrowing rate corresponds to the net price – it only indicates the amount of the loan interest you pay the bank for lending you the loan.
The effective interest or annual percentage rate, on the other hand, corresponds to the gross price: it includes the total costs including all additional costs such as commitment interest, which can vary from provider to provider. Since a BGH ruling in 2014, processing fees for loans have been inadmissible, so the difference between borrowing rate and effective interest rate is no longer high. Because the lender can no longer charge you costs such as account management fees or fees for a credit check.
You should only compare the offers of the different banks using the effective interest rate. Because this contains the total cost of financing that you will have to pay during the fixed interest period and therefore decides how expensive real estate financing will be.