Combination loan – annuity loan meets variable construction financing

The classic annuity loan is familiar to most who are interested in construction financing. Few people have heard of variable construction financing, and that there are combination loans that combine the two, almost no one knows. Interest rate comparison clarifies variable loans and the advantages and disadvantages of such combination loans.

Variable construction financing

This is a type of financing designed to promise the greatest possible flexibility. Especially in the Anglo-American area this concept is used very often. The principle behind this is explained quite quickly: there is no interest rate fixing in the classic sense, but the interest rate to be paid is based on EURIBOR. EURIBOR is the interest rate that European banks grant each other in order to lend to each other. This is published daily and can be viewed by everyone. The orientation to the EURIBOR takes place in such a way that (as a rule) every 3 – 6 months the interest rate to be paid on the variable loan is adjusted. A surcharge and a processing fee are added to the adjusted interest rate. From this then the valid interest rate for the variable construction financing is calculated.

Use flexibility for combined loans

In terms of flexibility, a variable loan is second to none. At each adjustment date of the interest rate free unscheduled repayments in any amount are payable without problems. Early repayment penalties, which are incurred in the case of a classic annuity loan in the event of premature full repayment, do not exist here. This flexibility can now be tied to classic construction financing in a combination loan:

• Part of the total loan is concluded as a classic annuity loan with a fixed term and fixed interest rate.
• The other part is a variable loan.

Together, this results in a combination loan that is half secure and plannable and the other half includes more flexible special benefits.

Combined loans require constant monitoring of the market

If one has chosen a classical financing, then one can lean back as a rule, at least up to the end of the interest connection, since everything is regulated in the apron. On the other hand, a combined loan consisting of an annuity loan and variable financing requires constant monitoring of the market. It can theoretically happen that the EURIBOR shoots up sharply and thus the interest rate adjustment would cause high additional costs. Then action must be taken quickly and the variable loan must either be repaid in full or converted into a normal annuity loan.

For whom is a combination loan useful?

Especially for those who do not want to give up a certain amount of security and planning, but still need a lot of flexibility. For example, if you know exactly that a larger amount of money will be available during the term of the construction financing (z.B. a life insurance policy or an inheritance), which would go beyond the scope of an unscheduled repayment of the annuity loan, one can certainly profit with a combination loan.

As an example, one can imagine the following scenarios:

Person A takes out a simple annuity loan for 150.000 euros from. His bank allows him to make unscheduled repayments of a maximum of 15.000 euros per year. If he now receives an inheritance in the amount of 50.000 euros, it may be 15.000 euros of it and repay 35.000 euros lie in the bank and currently do not even bring in interest. In the following year, he can again pay off 15.000 euros as an unscheduled repayment and on the account are still 20.000 euros. So, to be able to use the entire inheritance, you need a total of four years.

Person B, on the other hand, has a combined loan of 75.000 euros taken out. He also receives an inheritance in the amount of 50.000 euros. He puts this completely into his variable financing and can thus properly use the full inheritance at once.

So you see, a combination loan can really save money, because person A can not fully use the inheritance received and thus continue to pay interest on a residual debt, which he could actually minimize financially.

Biggest disadvantage: A combination loan ties the bank to the customer

Although there is a lot of talk about flexibility here, in one fact, however, the combination loan is extremely restrictive: The customer binds himself to the bank until the end of the annuity loan. If you find another financier who offers the variable part at a more favorable interest rate, he would have to be registered at the second rank in the land register. This increases the risk of the bank to receive the remaining debt in the event of an impending foreclosure and many will not accept this then either.

Not every bank and also not every credit mediator will point out the possibility of a combination loan. If you think that this is the right approach, you should ask directly and get advice. The basic prerequisite is that a loan broker offers a variable construction financing at all. ACCEDO AG, for example, is one of these providers. It is to be still noted: Generally one profits from variable building financings and thus also from combination loans rather in times of falling interest rates, these rise however again and the variable portion can fast more costs, than one can save by the special repayments.