A mortgage loan is a long-term loan, usually involving a loan amount in the six-digit range. Numerous borrowers nevertheless believe that comparing offers is not absolutely necessary because interest rates differ only slightly between banks. In fact, interest rate differentials are usually in the range of "only" 0.1 to 0.5 percent. Nevertheless, it is definitely advisable that you compare interest rates, especially for mortgage loans, because the savings potential is sometimes enormous.

## What are mortgage loans?

Mortgage loans are generally referred to as real estate loans, because in earlier times banks accepted a mortgage on the corresponding house as collateral there. Although nowadays almost exclusively land charges are used as collateral, the term mortgage loan has nevertheless become firmly anchored in the vernacular. Characteristic of such real estate loans are, on the one hand, the high loan amounts and, linked to this, the very long terms. Exactly these two facts also lead to the fact that the savings potential can be very large, even if there are perhaps rather smaller differences between the interest rates of the various banks.

## What is the current situation in the construction interest rates?

The interest you pay on a mortgage loan is often referred to as the construction rate. In recent years, particularly few loan seekers have compared offers with regard to an upcoming real estate financing, because the construction interest rates were at a very low level. Two years ago, you could get a construction loan with a good credit rating sometimes at an interest rate of less than 0.5 percent.

However, the current situation looks different. At the latest since the beginning of the year (2022), mortgage rates have increased significantly. While the average construction interest rate for a fixed interest rate of ten years was still just under one percent towards the end of 2021, today (mid-August 2022) you pay a whopping 3.2 percent on average when you take out a real estate loan. Since the interest costs have therefore risen significantly, a comparison of the offers in the field of mortgage loans makes more sense than ever before. Savings opportunities have also grown.

## Consider different types of loans in real estate financing

When it comes to comparing offers, then you should first find out what type of mortgage loan 1 construction financing models – … Continue reading is best suited for you.

Indeed, within the framework of real estate financing, there are different variants offered by banks, in particular:

- Annuity loan
- Final loan
- Repayment loan

The most common mortgage loan is the annuity loan. This is characterized by the fact that the monthly rate remains the same throughout the entire fixed-interest period, but the interest portion continues to decrease, while the repayment portion increases. With mortgage loans in the form of an amortizing loan, on the other hand, the repayment always remains the same, but the interest rates also fall here, so that the monthly installment continues to reduce.

The bullet loan is only recommended under certain conditions, because then you pay only the interest during the term, while the repayment at the end of the loan must be made in one sum. So before you compare the different offers, the first step is to decide on a loan type.

The annuity loan is often favored because the monthly rate remains constant. Sometimes, however, the amortizing loan may be the better alternative, especially if they want to have a steadily decreasing loan rate later on.

## What to look for when comparing interest rates?

The comparison of interest rates is not easy, especially for real estate loans. This is mainly due to the fact that almost all banks charge a so-called creditworthiness-based interest rate in connection with a mortgage loan. This means that the amount of interest you are ultimately offered will depend on your credit score. Therefore, so-called loan calculators can provide clues for a comparison in the first step, but in this way you will hardly find out the interest rates that you personally have to pay.

Therefore, when comparing mortgage loans, it makes sense to either turn to a mortgage broker or actually obtain individual offers from several banks. The advantage is that then – unlike the comparison calculator – your credit rating can also be taken into account.

In fact, the banks make this primarily on the following data, figures, facts and documents:

- Schufa information
- Income
- Employment
- Collateral
- Assets
- Equity
- Income and expenditure statement
- Income tax assessment

All these criteria lenders consult, and then settle on a loan rate that you can offer you personally. It is therefore advisable to either commission a financing broker to find the best offers or to do the work of obtaining individual offers from five different banks, for example. It would be wrong, however, if you completely forgo a settlement, because then you automatically forgo sometimes large savings opportunities on interest rates for mortgage loans.

## How big are the potential savings really – an example

The savings opportunities that exist on mortgage interest rates are massively underestimated by many borrowers in some cases. That's because, from a purely visual standpoint, interest rates often differ only slightly. For example, Bank A offers a mortgage loan at an interest rate of 3.25 percent, while Bank B might offer a construction interest rate of 3.48. Nevertheless, due to the high loan amount and the long term, even this smaller interest rate difference can lead to a considerable savings potential if you opt for the more favorable offer.

To see how much the potential savings might actually average out in practice, let's compare the following two sample offers:

Fixed interest rate: 10 years

Interest costs in 10 years (without repayment offsets): 113.750 euros

Monthly loan rate: 1.822.91 euros

Fixed interest rate: 10 years

Interest costs in 10 years (without repayment settlement): 126.000 euros

Monthly loan installment: 1.925 euros

Although there is a relatively small difference in the interest rates of only 0.35 percent with these two credit offers in the range of the real estate financing, nevertheless a clear interest saving results for the first ten years. This is because with credit offer A (without repayment offsetting) you pay 12.250 euros less in interest than with offer B, so that alone would definitely have made a comparison worthwhile.

There is also the positive side effect that, of course, due to the slightly lower interest rates of offer A, there is a lower monthly burden in the form of the loan installment. If you find a particularly favorable offer in the area of mortgage loans, the possible interest savings can of course be even greater. This also applies to a longer fixed interest rate and an even higher loan amount.

## Despite possible interest saving: Also on further conditions with the mortgage loan pay attention

On the one hand, it is of course very important that you compare the offers in the field of construction financing and consequently pay attention to the level of construction interest rates. By the way, the comparison criterion should always be the effective annual interest rate and not, for example, the tied debit interest rate, because neither costs nor repayment offsets are included there. On the other hand, however, when comparing offers, you should not ignore other conditions that may also be of great importance.

This applies in particular to the following conditions and contract contents:

- Repayment rate
- Fixed interest rate
- Special redemption
- Prepayment penalty
- Commitment interest

For real estate owners who want to finance the construction of a house, for example, the commitment interest rate estimated by the bank is of interest. Ideally, you won't even get to the term at which the lender would charge commitment interest. Another condition that is not unimportant is the possibility of making unscheduled repayments free of charge during the term of the loan.

## More equity usually reduces the construction rate

In addition to comparing offers, which you should definitely do when it comes to mortgage loans, there is another way to take advantage of potential savings. Indeed, the more equity you include in the real estate financing fund, the higher the equity ratio, the more favorable the interest rate that the lender will usually offer you. So if you have certain credit balances or assets that can be integrated into construction financing as equity, you should definitely take this measure. Indeed, between an equity ratio of, say, 10 percent and 25 percent, there can be large differences between offers in terms of the loan rate payable.

If the bank offers you a construction rate of 4.2 percent with an equity ratio of, say, 10 percent, it may well be that with a much higher equity ratio of, say, 25 percent, you will only have to pay mortgage rates of perhaps 3.1 percent. Equity, according to the report, also provides a large opportunity for savings on mortgage interest rates.

## Conclusion on the comparison of mortgage loans

As a loan seeker, you should definitely take advantage of the opportunity to compare interest rate offers on mortgage loans nowadays. Even small differences in interest rates of a few tenths of a percent over the years can save you several thousand euros in interest costs. Therefore a comparison is worthwhile in any case, particularly since this is free anyway in all rule and means only a certain expenditure of time.