Final financing

Final Financing - Final financing is the permanent, long-term financing of a property that replaces previously used interim financing or construction financing. It is typically arranged after the completion of the construction project or the repayment of a short-term loan and constitutes the final financing structure for the property. Final financing is usually a traditional amortizing loan with a fixed term, a fixed interest rate, and monthly payments consisting of interest and principal.

Distinction from Interim Financing

Final financing is at the end of a financing chain:

1. Equity: The buyer’s or developer’s own funds
2. Interim Financing / Construction Financing: Short-term loans during the construction phase, often with a variable interest rate; these are frequently drawn down in stages as construction progresses
3. Final financing: Long-term loan with a fixed structure that replaces all short-term liabilities

Final financing typically comes into effect in the following situations:

• After completion of a new construction and full acceptance
• Upon conversion of a variable-rate construction loan into a fixed-rate loan
• After the end of a commitment interest period when purchasing a new construction from a developer
• Upon repayment of a construction loan after the building’s completion

Key Features of Final Financing

Final financing can be structured in various ways:

• Fixed-rate period: Typically 10-20 years; a longer fixed-rate period offers planning security, while a shorter one provides greater flexibility if interest rates fall
• Amortization rate: A minimum of 2% per annum is recommended to become debt-free within a reasonable timeframe
• Right to make extra payments: Many final financing arrangements allow annual extra payments of 5-10% without prepayment penalties
• Follow-on financing: After the fixed-rate period expires, the final financing is extended through follow-on financing (forward loan or new terms)
• Subsidized loans: KfW loans can be integrated as part of the final financing and improve the terms

Timing of final financing: Commitment fees and forward loans

A frequently underestimated cost factor in final financing is commitment interest: As soon as the bank has approved the loan but the funds have not yet been fully drawn down-which is often the case for months in construction projects-the bank charges commitment interest on the undrawn amount (typically 0.25% per month = 3% p.a.). For a final financing amount of €400,000 drawn down in tranches over 12 months, this can quickly result in €6,000-8,000 in commitment interest. To avoid this, builders should ensure that they contractually agree on commitment interest-free periods (often 3-12 months). Those who wish to lock in the terms for the final financing during the construction phase can take out a forward loan: The bank locks in the interest rate today for a disbursement in 6-24 months-in exchange for an interest premium (known as a forward premium) of typically 0.01-0.03% per month until disbursement. In an environment of rising interest rates, the forward loan can secure favorable final financing; in a stable or falling interest rate environment, however, it makes less sense.

Practical Tip for Homeowners in Nuremberg and Franconia

In the Nuremberg metropolitan region, the price level for condominiums and houses is such that final financing must be carefully planned. We recommend obtaining offers for final financing no later than 6 months before the interim financing expires or the planned move-in date-and to involve not only your primary bank but also independent financing brokers who have access to a wide range of options. Especially for new construction projects by Nuremberg developers-such as in the Südstadt, the Rangierbahnhof area, or Erlangen-West-the construction phase often takes longer than originally planned; a forward loan or a contractually agreed interest-free grace period of at least 12 months can help avoid significant additional costs in such cases. Sparkasse Nürnberg and regional mortgage brokers such as Dr. Klein or Interhyp are good first points of contact for comparing terms.

Frequently Asked Questions

When exactly does the final financing begin?

Final financing begins when the short-term bridge loan or construction loan is fully replaced by a long-term loan. The exact date is defined in the contract and depends on the completion of the building, final acceptance, and the end of the commitment period. In practice, the notary coordinates the transition by confirming the full payment of the purchase price and arranging for the interim financing to be repaid. Delays during the construction phase can push back this date-therefore, final financing should be planned with sufficient flexibility.

Can I arrange final financing with a different bank than the one that provided the construction financing?

Yes. There is no obligation to arrange final financing with the same bank. Anyone who financed the construction phase with one bank can easily switch to a more favorable provider for final financing. In doing so, you should check for any prepayment penalties on the construction loan as well as the costs for the assignment or re-registration of the land charge in favor of the new bank. In practice, these switching costs often pay for themselves within a few months if the new bank offers significantly more favorable terms.

How much equity should I contribute for the final financing?

As a rule of thumb: at least 20% of the purchase price plus the full incidental purchase costs (real estate transfer tax 3.5% in Bavaria, notary fees approx. 1.5%, and, if applicable, real estate agent commission up to 3.57%) from your own funds. The higher the equity, the better the terms of the final financing and the lower the financing risk. Anyone contributing less than 20% equity must finance the incidental purchase costs with the loan-which is possible, but leads to a higher loan-to-value ratio and thus to interest rate premiums.

What is an annuity loan and why is it the standard form of final financing?

The annuity loan is the most common form of loan in real estate financing. It is characterized by a consistent monthly payment (annuity), which consists of an interest portion and a principal repayment portion. Over time, the interest portion decreases (because the remaining debt decreases), while the principal repayment portion increases accordingly-yet the monthly payment remains constant. This predictability makes the annuity loan particularly attractive to private buyers. For a final financing amount of 400,000 euros with a 3.8% interest rate and a 2% principal repayment, the monthly annuity is approximately 1,933 euros; after a 10-year fixed-rate period, the remaining debt has decreased to about 327,000 euros. For follow-up financing, a new loan must then be taken out at the prevailing market conditions.

Final Financing and Building Savings Contracts: An Underestimated Combination

Building savings contracts can be a sensible part of a final financing strategy. Those who save through a home savings contract and bring it to maturity receive a low-interest home savings loan that can be used as part of the final financing-particularly attractive during periods of high interest rates, when the contractually guaranteed home savings interest rate is significantly below the market rate. In the Nuremberg metropolitan region, regional providers such as LBS Bayern offer home savings programs that can be combined with government subsidies (housing construction bonus, employee savings allowance). Anyone who does not yet have a home savings contract and will need follow-up financing in 5-10 years should consider whether a home savings contract makes sense as an interest rate hedging tool for the future.

Back to the Real Estate Glossary.