Loans

Everything You Need to Know About Building Loans

Everything you need to know about building loans

There is a lot to think about, if you are going to build or renovate your house. Considering financing with a building loan, you can read more about what it is, how it works and what it costs here.

A building loan can be provided by the bank when you are going to build your own housing, a summer cottage or if you need to make a comprehensive renovation of your housing. At some banks, the loan is called a construction loan, or building loan, but they operate in the same way. Unlike a home loan, a building loan is not paid out in a lump sum. Instead, all costs incurred during the construction process are paid on an ongoing basis through a building loan account granted by the bank.

This means that you do not pay for more than what you use, but the bank sets a maximum amount based on the value of the building. When the house construction is completed, the bank turns the building loan into a regular home loan.

The interest rate for a building loan is a little higher than for an ordinary housing loan during the construction period itself. The reason is that the bank is at a greater risk of losing out on the deal during the building process. Once the property is completed, the bank can take collateral in it. Then the risk of the bank is reduced and the loan can be converted into a regular mortgage with a lower interest rate.

Costs linked to interest and other charges vary greatly from bank to bank. Therefore, it is smart to compare several banks to find the one that provides the best loan conditions.

How much can I get in a building loan?

When applying for a building loan, the bank will conduct a preliminary valuation of the value of the property. That valuation is the basis for the amount of the loan the bank will grant. In addition, a regular credit rating is made, which also affects the loan amount. If you have the opportunity to set up with a guarantor, it may affect the size of the loan because the bank will then receive an additional security.

The bank will also require a cash deposit. This means that they do not lend 100 percent of the building cost, but require you to contribute 15 to 20 percent of the cost. Keep in mind that using the cash deposit in the first place, you will shorten the period for which you need to pay interest on the building loan.

What does a building loan cost?

In addition to the nominal interest rate, banks take various types of fees for a building loan. These may include setup fees, notification fees and credit fees.

The fees can either come as a fixed sum, or as an interest fee. Pay attention to the fact that it is often these fees that make up the difference between the loan terms of different banks. Remember to study the loan terms carefully to be sure that you will find the best offer.

What benefits are included in a building loan agreement may also vary. Some banks may include, for example, good deals on insurance contracts, or free housing valuation of your current residence. That said, it is important to read the terms carefully.

The fees and benefits vary between different banks, therefore it pays to collect several offers of loans so that you can compare and choose the best.

Finally, it should be borne in mind that the building loan will be cheaper the shorter the construction process, since you can then more quickly convert the building loan into a housing loan with lower interest. Therefore, systematic planning and implementation can reduce borrowing costs. A building loan is usually given in two years.

How do I apply for a building loan?

When applying for a building loan, it is very important to have a good and clear planning for the construction project. The plan shall include a timetable and a detailed budget of costs. The bank needs to see all the costs and details of the process so that the loan amount does not exceed how much you manage to pay.

It often pays to take a building loan in a bank that is geographically in the same area that you are going to build. The bank often sends its own to value and control the process. If you live too far away, many banks will not grant the loan because it will be too complicated for them to have control of the construction.

About the author

Frank Ramos

Frank Ramos

Hello, I am a savings economist at GrayAction and an expert in personal finance. I hold a master's degree in economics from Stockholm University. I hope you will enjoy reading my articles on finance categories on the site.

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