If you buy an existing property, the purchase price is usually due after notarization. This is the time when your loan must be paid out and you start the repayment. The situation is different if you are building a house. In this case, you do not need the entire loan amount at once, but in partial amounts when construction phases are completed. If the construction is delayed, your costs at the bank will increase. The reason is commitment fees. What´s behind and how you prevent it.
Commitment fees instead of mortgage interest
When banks commit to lending you money, they cannot use it for another purpose. This is why you´re paying interests on your mortgage – that´s the deal. The interest only becomes due once the loan has been paid out by the bank. This is with a new build not all at once. If the mortgage contract has been signed, the bank cannot use your promised money for any other purpose. Furthermore the bank will not receive any interest from you if the loan has not been paid out. Hence they charge you a fee.
These so called commitment fees are normally lower than the interest rates on the mortgage itself, but nowadays most banks charge 1,5 to 3 percent in fees and hence more than the rate on the actual mortgage!
The good thing: Banks fortunately offer a commitment fee free period. Usually the commitment free period is between six and twelve months. Some banks also do not charge for 18 months and only some banks offer 24 months free of charge.
Have an eye on the commitment fee free period
Depending on how long your construction project is to last, the length of the commitment fee free period is an important factor to consider when choosing a mortgage. Otherwise you will have to expect additional costs.
The main facts you want to know:
The commitment fee is paid on moneys not yet disbursed
Interest is paid on all the moneys disbursed
You first have to use your own money – as committed to the bank – before the bank disburses it's loan
You don't need to repay any principal until the loan is fully disbursed
In this example, Bank A) offers a ten-month commitment fee free period. Bank B) offers only three months. After that both banks charge a fee of 0.25 percent of the loan amount per month. You expect to need the money in eight months. With bank A) there are no further fees for you. With bank B) you will have to pay 4375 Euro commitment fees. They offer you only three months out of charge but you need five more. Five times 0.25 per cent result in 1.25 per cent of the loan sum as additional fees.
Calculate commitment fees
Hypofriend can calculate for you exactly how many fees and interest you have to pay. Thus we can easily compare different offers from banks and find the ideal one for you. The calculation also helps you to plan better during the construction phase, because you know what expenses you will have to pay and you can save money if necessary. In the worst case, you could end up paying rent, interest and commitment fees. For this reason it is worthwhile to have a precise schedule when building a house and to try to keep on time as much as possible.