A mortgage for building a house with an economic system is almost the same as for buying an apartment. However, this “almost” is very important for this type of loan. The Saint Credit House suggests what to look for when choosing the best home loan.
Let’s start with the standard parameters that will determine the amount of monthly installments, insurance costs, or fees for early repayment. Of course, the most important parameter is the interest rate and its components.
It is the interest rate on the loan that will have a real impact on the amount of monthly installments. On the other hand, the total interest rate on the loan is also influenced by the margin and the reference rate. While we have no influence on the latter and it is not negotiable, the margin is the factor that differentiates the offers of individual banks the most. Its amount depends on the size of the loan and the value of the collateral.
Sometimes the amount of the margin and, as a consequence, the interest rate is also determined by the client’s use of other bank products. We can count on additional reductions if we choose a credit card, account or savings products. For example, in bankate setting up an account and regular influence of salary means lowering the margin by 0.3 pp. Life insurance can also result in a lower margin, such discounts by 0.1-0.2 pp can be obtained, e.g. in bank. The margin level may also depend on the number borrowers. At Credither, if at least 2 people with income join the loan or one borrower has 2 sources of income then the margin is reduced by 0.08-0.12 pp
First a plot, then a house?
That’s all in common. Home loan is more complicated because we are also dealing here with the question of the land on which the residential property will be built. First of all, to apply for financing the construction of a house by the economic system, you must have a construction plot. Simultaneous financing of the purchase of a plot of land and construction of a house is possible, but only in a few banks.
Currently, such a solution is available, among others, at Credither or Millenial bank. In this situation, it is necessary to provide the construction project together with the documents, and the building permit will have to be provided before paying out the next tranches of the loan. Most often, however, we get one loan per plot and construction only if the seller of the plot already has a building permit. After the purchase of the plot, it will be necessary to rewrite the permit and only then will the remaining tranches of the loan be launched.
In practice, however, it is better to buy a plot for a loan first and then apply for a loan to build real estate on it. Fortunately, we do not have to get attached to the bank that financed the purchase of land, and this allows us to choose the best offer of a construction loan. Borrowers often decide to borrow from the same institution because it involves fewer formalities and hence faster processing of the loan application.
Payment in stages
The loan for the house is paid in tranches after documenting the completion of subsequent stages of construction. In most banks, the most popular way of billing the tranche is by an authorized person. Banks will make such a check even when we present invoices for work done. Then, even if we document the use of the amount in 100 percent, the bank will still send its representative with an inspection.
During the inspection, it will be checked whether the works declared in the cost estimate have been carried out. It is not enough just to buy building materials, it is also necessary to use them. This means that if we are just starting construction, the money from the loan should be used for works related to foundations or erecting walls. The bank will not accept the situation when the first tranche will be used to buy roof materials, e.g. tiles. The work must be done gradually and we must use credit as the work progresses.
If the bank representative decides that the funds we used for a purpose incompatible with the loan or the works declared were not carried out at all, then the payment of the next tranche will be suspended. The borrower will have to bring the construction to a satisfactory stage.
The bank will estimate how much construction will cost
Another important issue is the total minimum cost of building the house. Here, banks do not rely on the borrower’s estimates, but they themselves determine, based on their own analyzes and data, the minimum cost of building a house.
So if, according to our estimates and arrangements with the subcontractor, we declare that we are able to complete the construction and close in the amount of e.g. $ 1,500 per square meter of living space, then the bank will not accept such an estimate anyway. The minimum construction cost in banks is from 1900 to even 2700 $ per square meter. This level depends on the location and size of the house. This means that if we are building a property with an area of e.g. 150 square meters, the minimum construction costs estimated by the bank will be from 285,000 up to $ 405,000. The borrower must have such a total amount of own and borrowed funds.
During the construction and launch of subsequent tranches, the client is subject to a grace period in capital repayment. Every month, it repays only interest on the part of the loan that has been launched, and as the next tranches are released, the amount of interest accrued increases. It is only when the loan is fully disbursed that the client begins to pay back both interest and capital.
As a result, during construction, when other costs are incurred (e.g. the cost of renting an apartment), monthly payments are lower than the target installment. If, while building a house, we can save and carry out work at a lower cost, then it is worth considering what to do with the remaining loan amount. On the one hand, these funds can be used for another purpose, e.g. for the purchase of furniture, or you can not run part of the loan. Thanks to this, the loan installment will be lower and the cost of interest we will pay will also decrease. Thus, the savings will be double.