• Plan a maximum of one-third of your household net income for your construction financing.
• Rule of thumb: You should have at least 20% equity for construction financing.
• Fast repayment reduces remaining debt and interest payments on your construction financing.

Have you decided to build a house? Have you already found the right plot of land? Then you now need solid construction financing from a bank. We’ll show you how to secure construction financing, the different types available, and what to consider when financing your property.

When the dream of owning a property becomes more concrete, it’s time for a financial check-up.

• Income: This includes net income, child benefits, and potential rental income. Do not factor in irregular income such as vacation or Christmas bonuses when calculating construction financing.
• Expenses: This includes all regular fixed costs. Plan for unpredictable expenses like repairs, household appliance replacements, or a new car.

A crisis-proof financing plan for your construction or property financing should account for unexpected financial setbacks, such as unemployment, illness, or divorce.

To ensure that the purchase price of your dream home and the loan payments don't take up all your financial space, you should calculate the possible loan payment for the construction financing conservatively using a calculator.

Rule of thumb: No more than one-third of your household net income should be paid to the bank each month for the construction financing.

The main cost items for your construction financing at a glance:

• Plot of land for which you want to use the construction financing (possibly including advice for the land)
• Construction costs (architect, structural engineer, construction company, or prefabricated house company)
• Landscaping/yard design
• Connection fees for house utilities (gas, water, electricity, sewage, telephone)
• Additional construction costs (e.g., property transfer tax, notary fees, insurance)
• Temporary construction electricity/water

There is often a longer period between purchasing the land and starting construction. According to our advice, if you have sufficient equity, it makes sense to pay for the land out of pocket. Alternatively, you can finance the land and the new construction separately. 

Annuity Loan

The classic among construction financings. Key features include a constant monthly repayment rate, which consists of both interest and principal payments. The principal repayment portion increases over time, reducing the share of interest. Advantages: Fixed interest rate for the entire term, making it highly predictable for your construction financing.

KfW Loan

The development loans from the Kreditanstalt für Wiederaufbau (KfW) offer particularly low interest rates for financing. However, obtaining the loan for construction financing is subject to specific conditions.

Bauspar Contract

During the savings phase, you can build equity for your property and secure the currently low interest rates for a future construction financing. Immediate financing for your property is also possible.

Follow-up Financing

When the interest rate lock period ends after 10, 15, or 20 years, it’s time to arrange follow-up financing for the remaining debt. This should be done in advance of the interest rate lock expiry to possibly secure better rates for the next construction financing.

What loan term should I choose for construction financing?

Interest rates for construction loans and financing are still low in historical terms, but they have already increased due to interest rate hikes by the European Central Bank to combat inflation. Based on our advice, you should opt for a fixed interest period of at least 15 years for the financing of your property. 

A high initial repayment reduces the remaining debt faster. With each payment, the interest portion of the rate decreases, and the repayment portion increases. Our advice: Take advantage of the current low-interest phase to set a repayment rate of at least two percent.

Extra repayments are beneficial. If you receive bonuses or an inheritance, you can use an extra payment to reduce the interest payments on your construction financing and repay more.

Before the bank grants a loan for the planned financing of your property, home builders need to submit several documents, including:

• Pay slips for the past three months (in copy)
• Income tax assessments for the last two years
• Proof of existing equity, such as statements of current or fixed deposit accounts
• Building plans, documents, property details

If your application for construction financing is rejected by the bank, there are usually two reasons: your creditworthiness or your age. Factors that affect creditworthiness include:

• Employment status (employed, civil servant, self-employed)
• Income level
• Collateral for the loan
• SCHUFA score
• Other liabilities 

• Term Life Insurance: Building a house is a significant financial burden. To secure the main earner(s) of the family, term life insurance is advisable.

• Building Insurance: This insurance is essential to protect the new home from damages caused by fire, water, hail, or storms.

• Builder’s Liability and Construction All-Risk Insurance: These are recommended for all home builders.