Commitment interest

Commitment Interest - Commitment interest is interest charged by a bank on the portion of an approved loan that the borrower has not yet drawn down. It typically applies after a grace period has expired and is usually 0.25% per month, or 3% per year.

How does commitment interest work?

When we take out a mortgage, the bank makes the entire loan amount available. When purchasing an existing property, the loan is usually disbursed in a single lump sum-however, for new construction or extensive renovations, disbursement occurs in several installments based on construction progress (progress payments according to MaBV or a contractual payment schedule). The bank charges commitment interest on the portion of the loan that we have not yet drawn down. This is intended to compensate the bank for the costs of holding the capital without receiving interest on the loan.

The amount of commitment interest is not set by law, but has settled as a market standard at 0.25% per month (3% per year) on the amount not yet drawn down. For an undrawn balance of 200,000 euros, this means additional monthly costs of 500 euros-a burden that many homebuilders underestimate. Commitment interest is added to the regular loan interest and billed separately. It is not included in the effective annual interest rate that the bank states in the loan offer-which is why a precise comparison of the commitment terms is particularly important.

Negotiate a grace period

The so-called grace period (also known as the interest-free period) is crucial for the total costs. This is the period after the contract is signed during which no commitment interest is charged. Depending on the bank and your negotiating skills, this period ranges from 3 to 12 months-and in some cases even longer. Especially for new construction projects, where the construction phase spans many months, we recommend agreeing to the longest possible grace period.

Some banks offer an extension to 12 or even 18 months for a small interest surcharge on the borrowing rate. We should carefully offset this surcharge against the potential commitment interest to choose the more economically favorable option. An example: With a 0.1 percentage point increase in the borrowing rate on a loan of 400,000 euros and an estimated construction period of 15 months, extending the grace period to 18 months can save several thousand euros.

Commitment Interest in Developer-Led Purchases vs. Custom Construction

When purchasing from a developer, the installment payments are legally tied to construction progress under Section 3 of the MaBV-the buyer draws down the loan amounts in predetermined stages. In this case, the drawdown schedule is easy to plan, as the milestones are contractually defined. With custom construction involving architects and individual contractor awards, the construction process is less predictable-delays due to weather, material deliveries, or a shortage of tradespeople can delay drawdowns and increase commitment interest. We recommend including a generous buffer in the financing agreement for the interest-free period, as construction delays in the Nuremberg region are not uncommon given the current workload of tradespeople.

Practical Tip for Nuremberg and Franconia

In the Nuremberg metropolitan area, we frequently observe construction periods of 12 to 18 months for new construction projects-for example, in the growing neighborhoods of Langwasser, Gebersdorf, or in the Nuremberg countryside (Wendelstein, Schwabach). Anyone who agrees to a grace period of only three months here may end up paying several thousand euros unnecessarily. We therefore recommend coordinating a realistic construction schedule with the developer or architect before securing construction financing and using this timeframe as the basis for the grace period during loan negotiations. It’s also worth comparing several regional and national banks-both for the commitment interest rate and the length of the grace period-as terms can vary significantly.

Frequently Asked Questions

Can commitment interest be deducted for tax purposes?

Yes, if the financed property is rented out, commitment interest can be claimed as income-related expenses against rental income-even during the construction phase, provided the intention to rent it out is established. This also applies to the grace period during which no commitment interest is yet incurred, provided that other financing costs (discounts, bank fees) are incurred. For owner-occupied residential property, a tax deduction is generally not possible. We recommend clarifying the tax treatment with a tax advisor at an early stage.

Can commitment interest be avoided?

It is virtually impossible to completely avoid commitment interest with staggered disbursements. However, by ensuring the longest possible commitment-free period, swift and structured construction management, precise call-off planning, and early coordination of all trades, we can significantly reduce costs. Some banks waive commitment interest for short periods if there is a fast payment schedule or if the customer has a good credit standing. We recommend explicitly addressing this point when selecting a bank.

How high are commitment fees compared to borrowing rates?

Commitment fees of 3% per year currently fall within the same range as the loan interest rate itself in an interest rate environment where borrowing rates for real estate loans range from 3% to 4%. This makes it a significant cost factor that should definitely be taken into account in the overall calculation of financing. During periods of low interest rates (2010-2021), commitment fees were often higher than the loan interest rate-a phenomenon that made the costs of holding capital particularly evident.

Do commitment fees also apply in the case of debt restructuring?

In the case of debt restructuring (loan extension or change of bank), commitment fees generally only arise if there is a longer period between the approval of the new loan and the actual disbursement-for example, because the transfer of the mortgage takes time or the maturity date of the old loan has not yet been reached. Many banks grant a short grace period (2-4 months) for loan extensions, as the drawdown occurs at short notice. When planning a debt restructuring, the disbursement date of the new loan should be aligned as closely as possible with the repayment date of the old loan to avoid overlaps that result in double interest costs.

Commitment Interest on Renovation Financing

Energy-efficiency renovations are often financed through a combination of KfW subsidy loans and equity. KfW loans have their own commitment interest rules, which depend on the specific product line: For the Federal Efficient Building Program (BEG), commitment interest does not begin until twelve months after loan approval. This gives builders a comfortable planning phase during which they can obtain quotes from contractors and coordinate grant applications. In the Nuremberg metropolitan region, we observe that high demand for contractors creates long lead times-sometimes up to 18 months between grant approval and the start of construction. Those who realistically factor in these lead times and combine subsidy programs with long grace periods can significantly reduce their overall financing costs.

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