How to choose a construction loan

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Financing is one of the key aspects of building a home. Anyone who wants to take up a construction loan has to consider a variety of factors. Particularly important, of course, are interest rates; if you compare several providers at a favorable point in time, you can save a lot of money.

In addition to the interest rates, the flexibility during amortization, the personal risk appetite and a possible splitting of the new mortgage in two or more tranches should be considered when taking out a construction loan. By the way, you can also take out construction loans for renovations and conversions on self-occupied or rented properties. However, not all mortgage lenders (especially insurance companies) offer construction loans.

Construction loan in Switzerland

Deciding on the type of construction loan

Fixed-rate mortgage: This is the most widely used form of real estate financing. At the beginning of the construction loan, the borrower and the bank agree on a fixed interest rate with a fixed maturity.

The LIBOR mortgage: Unlike the fixed mortgage, the interest rate remains flexible during the term (usually 2 to 5 years). Depending on the contract, the interest rate changes every 1, 3 or 6 months. The LIBOR (London Interbank Offered Rate) is used as the reference rate. This rate is publicly available and is set daily. Here you can get more information about the LIBOR interest rate.

The variable-rate mortgage: In this case as well, the interest rate remains flexible during maturity. However, unlike the LIBOR mortgage, the composition of the interest rate is not transparent since the providers do not communicate their margins. The advantage is that there is no fixed contract term: the borrower must only comply with the contractual notice period, which is usually 3 or 6 months.

The fixed-rate mortgage offers a high budget security because of the interest rate fixation. But in case of falling interest rates, the mortgage borrower does not benefit from them. However, due to the current record-low of interest rates and the low surcharge that has to be paid for long-term mortgages, the fixed-rate mortgage is a very attractive solution. In recent years, LIBOR mortgages have offered the most favourable terms on average though. In principle, LIBOR mortgages are particularly recommendable if there is an expected decline in interest rates. In addition, individual factors such as the professional or family situation have a great impact on which mortgage form is appropriate.

Make use of tax privileges with a construction loan

Anyone who wants to finance a property makes an important contribution to his or her old-age provision; a home increases financial independence in old age and is a safe investment. Therefore, the Swiss government supports home ownership with tax privileges. Through the indirect amortization, borrowers can pay the repayment amount to a pillar 3a account instead of paying it directly to the bank. The amounts paid into the pension account can be deducted from the taxable income up to a maximum amount. Interest gains are also tax-free in the restricted pension planning.

MoneyPark offers expert advice on real estate financing

At MoneyPark, experts provide you with detailed information on the current situation of the construction loan market. We also offer advice on the optimal financing strategy and discuss with you important topics like the mortgage rate, the amortization and the possible tranching of mortgages. The aim of our independent advice is to provide you with a favourable building loan that is tailored to your needs.

Current mortgage rates

LIBOR mortgage from 0.56%
Fixed-rate 10 years from 1.02%
Fixed-rate 5 years from 0.69%

The displayed interest rates are the best rates currently available. Your personal interest rates may vary depending on LTV, affordability, mortgage amount and the location of the property.