Pre-financing loan : Definition & explanation.

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With the pre-financing loan, borrowers can bridge the waiting time until the building loan is finally allocated. As soon as the building society contract is allocated, the loan replaces the existing pre-financing. However, the pre-financing loan does not need to be taken out at the building society, but can also be applied for through a conventional bank.

The essentials in brief

The essentials in brief

  • Thanks to a pre-financing loan, borrowers can already finance their property even if the building loan contract is not yet ready for allocation.
  • As a security for the pre-financing loan, the building society credit is usually pledged and / or a land charge is entered.
  • Such pre-financing usually runs for between one and two years.
  • The interest on the pre-financing loan is comparatively expensive.

What is a pre-financing loan?

What is a pre-financing loan?

The pre-financing loan is a conventional real estate loan, but is only concluded for a period of one to two years. Within these two years, the borrower has the necessary time to find final financing for the property and to complete it. The loan for pre-financing therefore serves to bridge the time until another type of financing is concluded.

This other type of financing is usually a building society contract. Borrowers pay in money over a longer period of time and then receive the home loan sum plus a home loan. However, when the loan is granted is strictly determined by the allocation process. If you still want to finance your dream property beforehand, you can take out a pre-financing loan to bridge the gap.

Before the pre-financing loan is paid out, however, a certain amount of money must have been paid into the home loan and savings contract. Usually, the amount of the deposits is around 50 percent of the total home savings sum. Once the deposit is made, the loan will be paid out for pre-financing.

Example of taking out a pre-financing loan

Example: Mr. Migs has found a plot of land in a fantastic location, which he would like to buy for himself and his family to build on. However, Mr. Migs’s home savings contract is not yet ready for allocation. However, he fears that another buyer for the property will be found before his home loan can be used in a year. For this reason, Mr. Migs decides to purchase the property through a pre-financing loan. The loan is to run for a total of one year and is secured with both a land charge and a building society contract. So the construction of the new property can begin immediately. After a year, the pre-financing loan will be replaced by the home loan.

Differences to the intermediate loan

The terms interim loan and pre-financing loan are often confused, but are expressly not synonyms. The most striking difference between an interim loan and pre-financing is that with interim financing, money was already awarded at a later date. In other words, the amount of home savings required has already been saved, but the home savings contract is not yet ready for final allocation. Because other factors, such as the minimum term, have not yet been met.

The interim loan usually has a (still) shorter term than the pre-financing loan. As a rule, it only takes a few weeks or months for the home loan contract to be allocated.

Advantages and disadvantages of pre-financing

Advantages and disadvantages of pre-financing

The biggest advantage of pre-financing is that you can finance your own dream property today. If, for example, a plot of land in a preferred residential area is available, hurry is usually required – waiting until the building society contract has been allocated would mean that another buyer for the plot of land would be found.

In return, the interest on the loan is usually higher than that of conventional real estate loans. Ultimately, borrowers ultimately buy flexibility with the pre-financing loan.

benefits disadvantage
Flexible repayment through follow-up loans Often only lockable with a follow-up loan
Payment of the entire loan amount Partially high pre-financing interest rates
Often useful for short-term bridging Term usually limited to 2 years
Good predictability through interest rate security  

Do pre-financed home savings contracts pay off?

 Pre-financing always involves additional costs. After all, borrowers pay comparatively high interest rates and usually do not make any repayments until the building society contract itself is ready for allocation. The rule of thumb therefore applies that the pre-financing loan should only be taken out for as short a period as possible.

However, the model can pay off insofar as borrowers can now use a particularly cheap real estate offer that will no longer exist in the future. If, for example, the dream house in the neighborhood costs 20,000 USD less than would normally be the case on the market, borrowers save money with the pre-financing loan.

In the comparison between the pre-financing loan with a home savings contract and the conventional real estate loan without a home savings contract, no general statement can be made as to which variant is cheaper. The interest rates of the three loans (pre-financing, home loan and real estate loans) and the terms are particularly important here.

How can I cancel a pre-financing loan?

How can I cancel a pre-financing loan?

With the pre-financing loan, a special repayment can usually be made. With this repayment, most of the remaining outstanding debt is paid off – this is the case when the building society contract is ready for allocation. Again, the prerequisite for this is that this is specified in the loan contract. If the agreement is missing, a prepayment penalty (VFE) is due, which is usually expensive. The compensation will be paid to the bank for the fact that it will lose interest due to the early termination.

The amount of the prepayment penalty depends on the loan amount and the conditions of the bank. The contracts contain clauses stating a maximum VFE. The details of the calculation of the prepayment penalty can also be found in the contract. Before a decision is made to terminate the loan early, the compensation must be calculated.

To calculate the exact amount of compensation, the following details are necessary:

  • Start of contract
  • Notice date
  • Remaining debt
  • Borrowing rate fixation
  • Installment amount and payment agreement

Agreements on special repayments of the pre-financing loan are also required when calculating the compensation. The easiest way to calculate the amount of compensation is to use a prepayment penalty calculator. Alternatively, borrowers ask the bank and have the amount calculated.

Pre-financing loans expand the room for maneuver

Whether pre-financing makes sense depends on the individual case. Anyone who receives an excellent offer to buy a property naturally wants to act quickly. In such a case, pre-financing can be worthwhile if your home savings contract is not yet ready for allocation.

However, it is important to obtain various offers for the pre-financing loan. Borrowers explicitly do not have to take out the loan from their building society, but can also choose a conventional commercial bank. Under certain circumstances, this offers more favorable terms, which quickly saves a few hundred or even a thousand USD against the background of the high loan amounts

Tip: At Good Finance, borrowers have the opportunity to compare real estate loans. In addition, experienced credit specialists are available to provide advice on all questions relating to construction and real estate financing.

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