The dream of owning your own four walls came true long ago, but the charming old-town apartment urgently needs a freshening up? Those who lack the necessary cash can take out a home or renovation loan from a bank. These loans are usually offered on good terms and provide support for bathroom renovations or the construction of a conservatory.
Home and renovation loan for property owners
We are currently in what is known as a low-interest-rate phase – the low level of interest rates makes it a good time to take out affordable loans. Most banks offer home and renovation loans with loan amounts between 5,000 and 50,000 euros. The term of the renovation loan can be determined according to your financial situation; terms between 12 and 72 months are usually possible. However, bear in mind: the shorter the term, the lower the total burden you ultimately have to shoulder.
Interest rate option: fixed and variable interest
Customers can choose between different interest rate options: the variable interest rate or the fixed interest rate. The indicator-linked, variable interest rate can change during the term – it is based on the 3-month EURIBOR. The fixed interest rate remains the same over the entire term, so the borrower knows exactly from the outset how much the loan will cost. Since interest rates are currently very low (March 2013), a loan with a fixed interest rate can certainly pay off, especially if it runs for several years.
Monthly payment
To ensure that the loan for the new garden shed or the bathroom renovation also brings joy, the monthly payment should not be too high. This burden can, of course, vary depending on your life situation: a family father should naturally take as little risk as possible and prepare for unforeseen expenses (children!). For a single person, the monthly payment can be somewhat higher. The monthly installment should be low – also agree on a special repayment right and pay off more in one lump sum at the end of the year if there is money left over.
And this is how you can save
The effective annual interest rate as the most important basis for comparison
The interest rate for the home loan offer is the key criterion when making a selection and differs from provider to provider. Be sure to obtain several offers before deciding on one! For a home loan, as with a conventional consumer loan, the effective interest rate is used as the basis for comparison. This expresses the cost of the loan per year as a percentage. The calculation of the effective interest rate is regulated by law, which is why different loan offers can also be compared with one another using the effective annual interest rate. Ultimately, it can then be decided whether the Ing DIBA offers the best interest rate for the home loan offer provides.
Note: Actually, all loan costs should be included in the effective interest rate – but they are only almost all included: appraisal fees, for example, are not included in the calculation of the effective annual interest rate.
Subsidies from the municipality, state, or federal government
Anyone who needs a renovation loan to switch to environmentally friendly energy supply and technology can count on contributions from the municipality, state, or federal government. Ask an energy consultant or your bank’s home loan advisor about subsidies.
Composition of the effective interest rate for home loans
- Time-related interest factor: If you hand someone money now, you have to receive more back at a later point in time in order to enter into this transaction. In practice, this is simply the interest rate at which the bank obtains the money for your home loan on the interbank market. This part accounts for the smallest share of the effective interest rate and is usually less than half a percent away from EURIBOR.
- Risk as an interest factor: Banks know that some loans are not repaid, and in order to offset these losses, a certain risk-related interest rate is added to the time-related interest rate. As a rule, this percentage also does not carry much weight. Large companies with impeccable liquidity can expect at most a quarter of a percent here, and students, for example, sometimes face the highest surcharges here, but even then only around 2%.
- Service as an interest factor: For most consumer loans, which also include the home loan, this interest factor makes up the lion’s share. This interest surcharge finances the bank’s branches and employees, the assessment of credit risk, and other bank services. The service factor is included both in the bank’s nominal interest rate and, through account management fees, in the final effective interest rate.
Our tip for anyone who likes playing with numbers: If the bank writes several interest dates per year into the contract, this naturally affects the effective interest rate, but try calculating the difference between one and several interest dates per year yourself (interest calculation).
