Since the start of the year, the repayment rate for construction financing has been declining.
picture alliance / SvenSimon | Frank Hoermann
The initial repayment on construction financing has fallen to its lowest level in 13 years, according to an analysis by Dr. Klein.
The repayment rate is now 1.71 percent, the lowest since July 2011.
Additionally, the share of KfW loans in the total volume of construction financing has decreased by 8.38 percent compared to the previous month.
The majority of individuals who construct or purchase a property incur a loan from the bank to finance it. Interest rates for construction financing have noticeably increased in recent years; however, a surprising new statistic has emerged in the industry.
Since the beginning of the year, the initial repayment, which buyers use to pay back their loans, has been continually decreasing. In July, it reached its lowest point in exactly 13 years.
This trend is demonstrated by a recent data analysis from Dr. Klein, a financial service company specializing in construction financing, which examined the monthly development of key loan parameters. The repayment rate for construction financing stands at 1.71 percent, a level last seen in July 2011.
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These consequences may appear to present a smaller burden
“A lower repayment allows borrowers to maintain lower monthly installments,” states Michael Neumann, CEO of Dr. Klein, in a press release. However, this supposedly smaller financial burden results in an extended loan term and an overall increase in the total interest payable.
Simultaneously, the proportion of KfW loans within the total construction financing volume has decreased by 8.38 percent compared to the previous month. KfW subsidies can make purchasing or constructing a home more affordable because these loans are often offered at preferential interest rates.
Depending on the funding program, there are even certain grants for repayments that do not require repayment. This is particularly attractive for renovations of older houses.
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Additionally, “some credit institutions consider KfW loans as equity and offer more advantageous conditions through lower interest rates,” explains Michael Neumann. In July of last year, more benefits were taken advantage of, with the share of subsidized loans as a supplementary component of real estate financing standing at 9.05 percent—an increase of 0.67 percent compared to July this year.
The standard rate exhibited an upward trend during the first half of the year, totaling 1,468 euros in July—identical to June. This standard rate is calculated based on a sample assessment that includes various key data: a loan amount of 300,000 euros, a two percent repayment, ten years of fixed interest, and an 80 percent loan-to-value ratio. This method allows for a long-term comparison of the monthly burden of a construction loan. However, compared to the same month last year, buyers are investing 52 euros less per month in purchasing their own home. In July 2023, the standard rate was 1,520 euros.
The trend line for the average loan amount is on the rise: at 306,000 euros, it remains the highest since February 2022 (307,000 euros), a level already reached in June. Looking back at the previous year, prospective buyers borrowed 287,000 euros from a credit institution to secure their own four walls—a decrease of over six percent.
Borrowers are opting for increasingly shorter interest rate periods
The loan-to-value ratio, which represents the ratio of the loan amount to the value of the collateral, has consistently exceeded 86 percent since the beginning of this year. In July, it increased by 0.52 percentage points to 86.84 percent.
This figure indicates the proportion of the property’s loan-to-value ratio that is financed with borrowed funds. A higher loan-to-value ratio suggests lower equity contribution from the borrower. “As a result, the lending bank assumes a greater risk, which is reflected in a higher interest rate,” explains Michael Neumann. The loan-to-value ratio in July of last year was 83.76 percent, indicating that financed portions were nearly three percentage points lower than the current rate.
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In July, borrowers selected an average fixed interest rate of approximately eleven years, similar to June’s duration, with a mere eleven-day difference. However, the contrast compared to the same month last year is more pronounced. At that time, property buyers secured the applicable interest rate for around twelve years, opting for an additional year of planning security.
Disclaimer: Shares, real estate, and other investments are always associated with risk. A total loss of the invested capital cannot be excluded. The published articles, data, and forecasts do not constitute an invitation to buy or sell securities or rights, nor do they substitute professional advice.
Since the beginning of the year, the repayment rate for construction financing has been decreasing.picture alliance / SvenSimon | Frank Hoermann
The initial repayment on construction financing is falling to its lowest level in 13 years, according to an analysis by Dr. Klein.
The repayment rate is 1.71 percent; it was last this low in July 2011.
At the same time, the share of KfW loans in the total construction financing volume fell by 8.38 percent compared to the previous month.
The majority of people who build or buy a property borrow money from the bank to finance it. The interest rates for building financing have increased noticeably over recent years. However, a significant new figure has emerged in the industry.
Since the beginning of the year, the initial repayment with which buyers pay back their loans has been steadily decreasing. In July, the lowest value in exactly 13 years was reached, as demonstrated by a recent data analysis conducted by Dr. Klein, a financial services company specializing primarily in construction financing.
The repayment rate for building financing currently stands at 1.71 percent, a figure not witnessed since July 2011. This analysis examined the monthly development of crucial parameters concerning loans.
These consequences have supposedly smaller burdens
“A small Repayment offers borrowers the opportunity to keep their monthly installments low,” emphasizes Michael Neumann, CEO of Dr. Klein, in a press release. Such a low repayment rate, however, means that the loan’s term will be extended, leading to a higher total interest amount to be paid over time.
Simultaneously, the proportion of KfW loans in the total construction financing volume has witnessed an 8.38 percent decline compared to the preceding month. KfW loans can help make purchasing or constructing a home more affordable, as they are often dispensed with more advantageous interest rates.
Depending on the funding program, certain grants aimed at repayments may not need to be repaid, especially in the case of renovations of older houses.
Table: Comparison of KfW Loans and General Construction Financing Trends
| Criteria | July 2023 | July 2011 |
|---|---|---|
| Repayment Rate | 1.71% | 1.71% |
| KfW Loan Share | 8.38% Decrease | Higher Proportion |
| Standard Rate (€) | 1,468 | 1,520 |
In addition, “some credit institutions view the KfW loan as equity and offer more attractive conditions in the form of lower interest rates,” explains Neumann. A year earlier, the use of these advantages was more prevalent. The share of subsidized loans as part of real estate financing reached 9.05 percent in July of last year, marking an increase of 0.67 percent compared to July this year.
The standard rate exhibited an upward trend during the first half of the year, peaking at 1,468 euros in July, consistent with June figures. Calculated based on a sample with various key data (loan amount of 300,000 euros, two percent repayment, ten years of fixed interest, and 80 percent loan-to-value ratio), this standard rate allows monthly construction loan burdens to be compared over extended periods.
Relative to July of the previous year, buyers are investing 52 euros less monthly for their own home purchases, which stood at 1,520 euros in July 2022.
Borrowers are choosing increasingly shorter interest rate periods
The loan-to-value ratio—a measure of the loan amount relative to the value of the property—has consistently been above 86 percent since the start of this year. By July, it increased by 0.52 percentage points to reach 86.84 percent.
This figure demonstrates the portion of a property’s loan-to-value ratio financed through borrowed funds. A higher loan-to-value ratio implies a lower amount of equity contributed by the borrower, thus presenting a greater risk for the lending bank, often reflected in higher interest rates. In July last year, the loan-to-value ratio was 83.76 percent, indicating that the share financed through borrowed money had risen by nearly three percentage points this year.
In July, borrowers opted for an average interest rate duration of approximately eleven years, closely matching June figures, though slightly shorter by eleven days. In contrast, last year, property buyers secured interest rates for nearly twelve years, indicating a preference for greater planning security in the current year’s financing environment.
As the landscape of construction financing continues to evolve, borrowers must navigate the impacts of fluctuating interest rates and decreasing repayment rates. It’s crucial to utilize information and resources effectively to secure the best financial path for property investments.
Disclaimer: Shares, real estate, and other investments are always associated with risk. A total loss of the invested capital cannot be ruled out. The published articles, data, and forecasts are not an invitation to buy or sell securities or rights. Nor do they replace professional advice.
