When planning to build a house, not every Investor already has a plot of land on which he can invest. Therefore, the question arises, is it possible to take one loan for a building plot and build a house? Some banks provide for such a possibility, which is a convenient solution from the procedural point of view, we go through all the formalities once. However, in this situation, at the time of purchasing the plot, the Investor must already know what house will be built on it, so that he can also complete all the formalities related to financing the construction. Another solution that will allow you to finance the purchase of a plot of land may be a separate mortgage or cash loan. Let’s see what other types of loans can be used.
Mortgage
It is a type of special-purpose loan that allows you to finance, among others: the purchase of a flat or house on the primary or secondary market, renovation and retrofitting of a property, as well as for the purchase of a plot of land or construction of a house. The loan is secured with a mortgage that is entered in the land and mortgage register of a given property. An own contribution is also required. If we want to allocate a mortgage to build a house, then the amount of the security, i.e. the erected building, is necessary until the bank is entered in the mortgage. An important difference from the construction and mortgage loan is the fact that in order to obtain a mortgage loan, the investor is not required to own a construction plot. The construction mortgage loan is disbursed in tranches, in the case of financing the purchase of a plot of land or other real estate, the payment is a one-off payment. A mortgage loan can also be a good solution to get funds to finish your home. Many people use this form of construction lending, precisely because the requested loan amount can include funds for finishing, which will also allow you to calmly plan this stage of implementation, without having to apply for another loan.
Mortgage loan
A mortgage, unlike a mortgage, can be used for any purpose. To obtain it, it is necessary to have ownership of the real estate pledged, which will be security and has a land and mortgage register. A mortgage loan has a higher interest rate than a loan, but an own contribution is not required here. You can also finance your home finishing with a mortgage.
Cash loan
It is not a special-purpose loan, so the bank will not check what we plan to spend it on. Such funds can be used to finance the purchase of any thing, including a construction plot, which can then be partially included in the own contribution in the case of a construction and mortgage loan. When granting a cash loan, it is not necessary to provide documents regarding the property or confirming the transaction. The process of obtaining a cash loan is shorter than a mortgage loan. It is possible to allocate a cash loan to build a house, but this solution is not very profitable. A cash loan usually has no collateral, and therefore banks compensate for their credit risk by applying a significantly higher interest rate.
The interest rate on the loan for building a house
The interest rate on the loan is a significant part of the costs associated with incurring a financial obligation. It is a component that has a direct impact on the amount of the installment paid. The loan interest rate may be fixed (determined when signing the contract and valid throughout its duration) or variable (the interest rate applicable at the time of signing the contract will change many times during the repayment of the liability). Almost all mortgage loans are based on a variable interest rate and are charged over the entire loan period on the declining principal that remains to be repaid after each subsequent installment. The components of the floating interest rate are: the bank’s fixed margin and the WIBOR rate, which is determined by the market and its value is variable. The interest rate on the loan may differ between banks,
The loan interest rate and the WIBOR rate
The term WIBOR is defined as the interest rate at which banks lend money to each other on the interbank market. The related costs are passed on to the borrowers, which affects the interest rate on the loans granted. 3M or 6M (3 months, 6 months) is a frequently quoted indicator that defines the interest rate, which defines the period covered by the WIBOR rate. The WIBOR rate most frequently used by banks is 3M, which means that the loan interest rate will be updated every 3 months. Depending on the situation on the financial market, the 3M rate is more favorable, when the WIBOR value drops, then the loan costs will drop faster. On the other hand, if the interest rates increase, then borrowers whose loan is based on the 6M rate benefit,
Loan interest rate and APRC
When choosing a loan for construction, you should check the actual annual interest rate, i.e. the so-called APRC. It is an indicator that shows the actual cost of the entire loan on an annual basis. It informs about the total cost of the loan, which, apart from interest, also includes other elements such as: insurance, bank commission and other possible fees. Before making the final decision on choosing a specific loan offer, especially when taking out a long-term construction loan, it is worth checking the APRC of the entire liability.
Creditworthiness
In order to take out a loan to build a house, the investor must obtain regular income, in the appropriate amount, which will provide him with the so-called creditworthiness and make it possible to undertake a financial obligation.
How does the bank calculate creditworthiness?
Before a bank grants a loan, especially a loan as large and long-term as a home construction loan, it must check whether the investor has the ability to pay the loan installments on time. To confirm the income obtained, the borrower is obliged to provide an appropriate certificate issued by the employer on a bank form. The form of employment on the basis of an employment contract for an indefinite period of time gives a greater chance of a positive consideration of the application than a fixed-term contract or a mandate contract or a specific task contract.
If the borrower runs his own business, then the confirmation of the income obtained are tax declarations from the previous tax year, as well as bank statements, usually from the last few months. In this case, copies of the company’s registration documents are also required.
When assessing a customer’s creditworthiness, the bank takes into account its constant maintenance expenses and current financial obligations, i.e. other loans, loans, installments or credit cards. When applying for a loan to build a house, you can improve your creditworthiness by paying off debts and by giving up credit cards. It is worth knowing that the unused credit card limit also reduces your creditworthiness.