Construction loan

Author : Kristen

Construction loan

In Switzerland, the construction loan serves exclusively to finance construction projects (new constructions, conversions and renovations). It can only be granted by a bank or by certain public insurance companies.

In general the construction loan is used via a current account, depending on the construction costs incurred within the credit limit as specified in the contract. For each disbursement of funds, an authorisation must be signed by the client, bank, and general contractor or architect.

The loan is secured by collateral on the property being financed.

Upon completion of construction or renovation, the bank continues with the consolidation (transformation of construction loan into long term debt) and it is only at this moment that the mortgage loan can begin and the interest rate can be determined.

In order to guarantee rate security, you can reserve a mortage loan interest rate from the beginning of construction that applies to a specified completion date: in bank terms, this is the "forward" or the "reserved rate." Generally, an increase in rates applies if the funds are disbursed after more than 6 months.

Advantage :

  • You are protected from an increase in rates on your overall loan

Drawbacks :

  • You can not change financial institution at the time of consolidation
  • If the consolidation intervenes after the rate reservation date, you pay a double rate.
  • You will not benefit from potential rate decreases

However, certain institutions nowadays offer a partial consolidation during the construction loan term. To be honest, as soon as the first construction payments are made, you will be able to consolidate this layer into a mortgage loan before the construction is completed.

Advantage :

  • You are protected from an increase in interest on this layer

Drawbacks :

  • You can not change financial institution at the time of full consolidation

The interest rate on a construction loan is made up of an increased variable rate plus quarterly commission of 1/4%.

Example: variable rate 3%, your construction loan extends to a six month period, your rate will be 3% + (2 x 1/4%) = 3.5%

DL negotiates the best rates for these kinds of loans.

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