Post-financing house construction
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WHAT IS POST-FINANCING?
If, during the construction phase, the budget is not sufficient for the completion of the construction project, contrary to planning, additional financing is required.
You have various options for subsequent financing:
Ask your current lender whether you can increase your loan. Your term and conditions may also change.
Ask your current lender for another loan.
If you have a home loan and savings contract - check whether you can use the amount saved in your home loan and savings contract for additional financing. In this way, you could take out a favorable building society loan.
You can consider debt restructuring, i.e. replacing an existing loan with a new one with more favorable conditions.
You can also ask another bank to provide additional financing for the missing amount.
If you have collateral that you can use as security for a loan (e.g. a car, watch or electronics), a pawn loan would be an option for you.
PROCESS OF SUBSEQUENT FINANCING
Additional financing should be initiated as soon as it becomes apparent that the available budget will not be sufficient. This is because the lender often needs time to process the loan and pay out the money. If there are already outstanding invoices from tradespeople that cannot be paid, the worst-case scenario could be that construction is halted.
How do I prepare for my appointment with the bank?
First of all, you should be clear about the reasons for your bottleneck. For example, the cost of materials may have risen sharply, or perhaps your construction company has gone bankrupt. Another reason could be an unexpected career change if you had budgeted part of your salary for completion. The better you can explain to the bank why you need additional financing, the better your chances of approval, subject to creditworthiness.
What documents do I need?
Your potential lender will usually need the following documents from you in order to better plan the refinancing:
A list of the construction work still to be carried out.
Extracts from the land register with the current land charges (if not already available).
Some banks require up-to-date appraisals on the value of the house.
Some banks require confirmation from experts that the current budget is not sufficient to complete the construction site.
If you are applying to a third-party bank:
The previous loan documents
Proof of income
Copies of bank statements from the last three months
HOW HIGH CAN A FOLLOW-UP FINANCING BE?
The amount of additional financing depends on various factors. After all, the budget has already been set in advance and must now be recalculated using the available funds. The bank set a certain value for your property when you took out your loan. If this value has not yet been exceeded and you can afford a higher installment, subsequent financing is usually possible. It becomes more difficult if this value has already been reached or exceeded. Then, of course, your monthly income is the main factor in ensuring that the loan installment can be paid.
WHAT HAPPENS IF I DON'T GET ADDITIONAL FINANCING FROM THE BANK?
In this case, you should first postpone any work that is not absolutely necessary. The loft conversion or finishing the garage can perhaps wait. This will give you time to look for alternatives.
You can choose from these alternatives for additional financing, for example:
Pawn loan: You use one or more collaterals or your car as collateral for a loan. The disadvantage of this is that the amount of your loan is limited to the partial value of your item. The advantage over a private loan is that you do not need any further collateral.
Private loan: You take out a loan from a private lender. The conditions are often lower than for a bank loan. The advantage over a pawn loan is that you don't need any collateral. The disadvantage is that you need at least an average credit rating.
Installment loan: With this type of loan, you agree a loan with a fixed interest rate and fixed term. The advantage of this is that the interest is based on the remaining debt and decreases with each repayment - this also reduces the amount of the monthly payment. The disadvantage is that the installment is particularly high at the beginning of the loan - so you have to be able to afford it first.
Friends and family: Even if it is often a big hurdle to overcome, a loan from friends or family offers the advantage that it is usually interest-free. The disadvantage is that you have to disclose your financial situation, the advantage is that in most cases you don't have to pay any interest.
DO I PAY HIGHER INTEREST IF I REFINANCE?
You do not necessarily pay higher interest rates if you refinance. If the current situation on the financial market allows it (which is currently not the case due to several increases in the prime rate), you can often extend your loan without an interest rate increase. However, it is important that the calculated property value for the collateral is not exceeded. Alternatively, you can take out a different type of loan with, for example, free use. In this case, the interest rates are usually higher than for a real estate loan.
HOW CAN I PREVENT SUBSEQUENT FINANCING?
Good financial planning is the most important way to prevent subsequent financing. Make sure that you have taken the following points into account:
TO BE CONSIDERED | THAT MEANS |
|---|---|
Create a cost breakdown | Make an exact cost breakdown with all the amounts you can plan for. It is best to have this list checked by experienced builders so that you don't forget anything. |
Plan for reserves | Sometimes prices increase or you forget to factor something in. It's better to calculate with a few thousand euros more to avoid additional financing. |
Consider alternatives | If your budget is already maxed out at the planning stage, think about a plan B. For example, you can postpone the completion of some items for a few years or keep collateral ready so that you can take out a pawn loan. |
Expect economic changes | Sometimes something unforeseen happens, such as a job loss or months-long delays in deliveries. You should therefore also take into account that the completion of your project may be delayed. |
Arrange special repayments | If you borrow more money than you actually need to be on the safe side, agree on the possibility of being allowed to pay back more money in the meantime so that you can pay back the money you don't need sooner. |
Consider a loan with a reserve option | With a loan with a reserve option, you borrow a certain amount but agree with the bank that you can only borrow an extra amount if necessary. Banks usually charge extra for this, but a loan with a fixed reserve option (e.g. €20,000) can be helpful if you run out of money at the end. |
FREQUENTLY ASKED QUESTIONS
Is there a difference between refinancing and follow-up financing?
Although the two terms are often used interchangeably, there is a difference between these two forms of financing. While in the case of follow-up financing the budget is not sufficient and the loan already taken out has to be extended (e.g. in the form of a term extension), at the end of follow-up financing there is still residual debt that could not be factored in.
What interest rates should I expect when refinancing?
As with many others, interest rates for this type of loan depend, among other things, on the current situation on the money and capital markets and your credit rating. None of this matters with a pawn loan, as you only use one of your collaterals as collateral and temporarily exchange it for money. Even with a loan from a friend or relative, your situation is in most cases irrelevant.
Can I also take out a second loan to complete my building project?
If your financial situation allows, you can of course also take out a loan with free use for the subsequent financing of your house construction. However, the interest rates are usually higher than for a real estate loan. You can take out a pawn loan independently of other loans, as it is based solely on the value of an item you own.