Construction Financing - Fixed Interest Period

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It was rather an objective educational campaign on my part :)
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That is exactly how my attempt at clarification is to be understood.

don’t argue... calculate ;)

so here is simply the example:

500k financing, 1600€ installment.

how does it look after 10 years?

fixed interest period/interest rate/interest paid/outstanding debt after 10 years
10 / 0.96% / 40,924€ / 348,924€
15 / 1.43% / 62,541€ / 370,541€

so first point: for 5 more years of fixed interest you pay 21,617€ more in interest here.

how does the outstanding debt look after 15 years?
298,534€
so you have paid off 50,000€ more in 15 years than after 10 years, but you have paid for 5 years (with a monthly 1600€ installment). that means to have 50,000€ lower outstanding debt, you had to pay 96,000€ more!!!

what can the interest rate be after 10 years so that the 10-year fixed interest period is worthwhile?
simple calculation:
follow-up financing with 348,924€, monthly 1600€ installment (so the comparison is equal!) and after 15 years you have to end up with 298,543€ outstanding debt.

i come to 2.809%

thus the cost for the period from year 11-15 is 2.809% interest rate.
so if you can finance it cheaper after 10 years? then why not.
if the interest rate after 10 years is above 2.80%, then the 15 years would have been worthwhile.

BUT now why i would still take the 10 years:
currently you want to finance almost 100% of the purchase price = expensive interest
1. point:
after 10 years you have paid off part of it (150k€!)
2. point:
the value will probably be higher in a few years, we can also calculate conservatively and say: 550-600k of value (if not more!)

the follow-up financing would then have a loan-to-value ratio of 64% (value 550k€), maybe even below 60% (value over 585k€)
thus best conditions at the banks.

PS. currently the best conditions would be around 0.50%; so if you assume that the interest rates should rise by about 2% in 10 years, then they would be at 2.50%, still cheaper than taking 15 years now (break-even at 2.80%)

another advantage:
you can also gladly start the follow-up financing 5 years earlier, so in 5 years.
if you notice that interest rates are slowly rising, then you do the follow-up financing.
current interest rates: 0.50% + forward premium 0.81% (0.015% per month, 6 months free, usual at many banks currently) = 1.31%
so if interest rates rise by 1% in the next 5 years, it would still be cheaper!

also you can then do it again directly for 10 years. thus 10 years + 10 years.

this is how i always calculate it. of course, if the 10 years are at 0.96%, the 15 years at 1.15%, then the 15 years would be worth considering.
personally, i like the 10 years (most economically sensible, because all banks offer this fixed interest period, thus better comparison)
or go directly for 20 years fixed interest period (where you can pay off a lot in 20 years with special repayments, and thus also manage to pay off the entire loan in 20 years)

the 15 years are somehow neither here nor there... and if you also do KFW (where you only have 10 years fixed interest period) the 15 years are even less attractive to me (if you want to change banks after 10 years).

We are not arguing … ;)

Correction:

…
It was more of an objective awareness campaign on my part :)

My attempt at clarification should be understood in exactly the same way.

don't argue... just calculate ;)

so here is just the example:

500k financing, 1600€ installment.

how does it look after 10 years?

fixed interest period/interest rate/paid interest/outstanding debt after 10 years
10 / 0.96% / 40,924€ / 348,924€
15 / 1.43% / 62,541€ / 370,541€

so first point: for 5 more years of fixed interest period you pay 21,617€ more in interest here.

how does the outstanding debt look after 15 years?
298,534€
so you have paid off 50,000€ more in 15 years than after 10 years, but you have paid for 5 years (with a monthly installment of 1600€). That means to have 50,000€ less outstanding debt you had to pay 96,000€ more!!!

how can the interest rate be after 10 years, so that the 10 year fixed interest period is worthwhile?
simple calculation:
follow-up financing with 348,924€, monthly 1600€ installment (so the comparison is equal!) and after 15 years you have to end up with 298,543€ outstanding debt.

I come to 2.809%

thus the period from year 11 to 15 costs 2.809% interest rate.
if you can finance cheaper after 10 years? then why not.
if the interest rate after 10 years is above 2.80%, then the 15 years were worthwhile.

BUT now why I would still choose the 10 years:
currently you want to finance almost 100% of the purchase price = expensive interest
1st point:
in 10 years you have paid off part (150k€!)
2nd point:
the value should be higher in a few years, we can also calculate conservatively and say: 550-600k in value (if not more!)

the follow-up financing would therefore have a loan-to-value of 64% (value 550k€), maybe even under 60% (value over 585k€)
thus best conditions at banks.

PS. currently the best conditions would be around 0.50%; if you assume that interest rates will rise by about 2% in 10 years, then they would be at 2.50% which is still cheaper than taking 15 years now (break even at 2.80%)

another advantage:
you can also initiate the follow-up financing 5 years earlier, so in 5 years.
if you notice that interest rates are slowly going up, then you do the follow-up financing.
current interest rates: 0.50% + forward premium 0.81% (0.015% per month, 6 months grace, common at many banks currently) = 1.31%
so if interest rates rise by 1% in the next 5 years, it would still be cheaper!

besides you can then do it again for 10 years. So 10 years + 10 years.


that's how I always calculate it. Of course if the 10 years are at 0.96%, the 15 years at 1.15%, then the 15 years would be worth considering.
Personally I like the 10 years (most economically sensible, because all banks offer this fixed interest period, so better comparison)
or go directly for 20 years fixed interest period (where you can repay a lot with special repayments over 20 years, thus you can manage to pay off the entire loan in 20 years)

the 15 years are somehow not quite right... and if you also do KfW (where you only have 10 years fixed interest period) the 15 years are even less attractive for me (if you want to change the bank after 10 years).

Thanks for the detailed explanation. I only calculated up to about halfway through your presentation. Meaning interest savings and comparison of outstanding debt after 10 and 15 years. We want to have about 300k€ outstanding debt after 10 years. The plot and the house will definitely be worth 500k€+ , probably much higher. So the new financing should not be much more expensive. Sure a risk, but an acceptable one.

You forget that the customer with a 15-year fixed interest rate can switch to a new loan after 10.5 years if the interest rate level remains low.
But thanks for the calculations.

The premium from 10 years to 15 years is currently relatively high. I would either go directly to 20 or stay at 10.

don't forget, when purchasing it's 10 years + 6 months after full disbursement, so that's possible, but then we would probably be at an interest rate of 2.9% which can happen after 10 years (because of a few more months at 1.43%)

and if you're already thinking about switching to a cheaper interest rate, I wouldn't do the 15-year fixed interest period for that reason...

much worse is when you are building a new house, people do:
- part 10 years, because of KfW
- rest 15 years...

that's really the worst thing there is, because after 10 years you usually need the refinancing for the KfW loan, but due to the "full disbursement," which for new builds can also take 1 year or longer, you can only get out of the other contract after 11.5 years or later.

there are many banks that do forward deals with 2 components, if the components are at most 12 months apart, this restricts the choice of banks massively again, in the worst case you don't have the cheapest bank to choose from.

but back to the topic, if they do the 10 years, with some special repayments the remaining debt after 10 years is 300k, then you can comfortably do the refinancing in a few years, which is likely the cheapest option with 90% probability.