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Construction loan. Construction financing for residential property.
What is a construction loan?
A construction loan is a form of financing used for the construction, conversion or renovation of real estate. The lender pays the invoices that are due during the construction phase. Following completion of the building work, the loan is converted into a mortgage. Interest accrues during the construction phase, usually at a higher rate than with a mortgage.
Which requirements need to be satisfied in order to be granted a construction loan?
In principle, the same basic requirements apply as for a mortgage. To be granted a construction loan, you need a deposit of least 20% of the construction total and a gross income which is at least three times higher than the housing costs for the property being built. You will also need an approved construction project before you can take out a construction loan.
What alternatives are there to a construction loan?
Many mortgage providers will also finance a building project with a mortgage instead of a construction loan. This also involves opening a building account into which the mortgage is paid either in instalments or as a lump sum. Compared with a construction loan, interest on the amount paid out for the mortgage accrues from the outset. The rates tend to be more attractive than with a construction loan, and it doesn’t need to be converted into a mortgage at the end of the construction phase.
If a mortgage has already been taken out, the conversion or extension of a property can also be financed by increasing the mortgage amount, provided the relevant affordability and loan-to-value ratio requirements are met.
What others wanted to know.
Our property experts give an insight into a selection of the most frequently asked questions. You can submit your own question too. We will be happy to help you.
Marie B. (45), Aarau
How does a construction loan differ from a mortgage?
A construction loan is paid out in stages during the construction phase. With every invoice, the loan amount increases and interest only accrues on the amounts already drawn. Following completion of the building work, the construction loan is converted into a mortgage.
A mortgage, however, is paid out as a lump sum or in instalments. Interest accrues in accordance with the amount paid out. Interest rates for mortgages are in most cases more favourable that those for construction loans.
Manuel G. (48), Kriens
Can I increase my existing mortgage for a conversion project?
If you meet the relevant affordability and loan-to-value requirements even with a higher mortgage amount, in many cases it is possible to increase your mortgage under the condition that the value of the property increases following the conversion or renovation. Alternatively, taking out a separate construction loan for the conversion may also be an option.
Marie B. (45), Aarau
How does a construction loan differ from a mortgage?
A construction loan is paid out in stages during the construction phase. With every invoice, the loan amount increases and interest only accrues on the amounts already drawn. Following completion of the building work, the construction loan is converted into a mortgage.
A mortgage, however, is paid out as a lump sum or in instalments. Interest accrues in accordance with the amount paid out. Interest rates for mortgages are in most cases more favourable that those for construction loans.
Manuel G. (48), Kriens
Can I increase my existing mortgage for a conversion project?
If you meet the relevant affordability and loan-to-value requirements even with a higher mortgage amount, in many cases it is possible to increase your mortgage under the condition that the value of the property increases following the conversion or renovation. Alternatively, taking out a separate construction loan for the conversion may also be an option.
