Banks charge commitment interest if a loan or part of a loan is not drawn down within a certain period of time. Particularly in the case of construction projects, it is customary to disburse the loan in installments in line with the progress of construction work. In the following article you will find out when commitment interest is due and how you can avoid the interest calculation with clever planning.
What is commitment interest??
Once the bank has approved a loan, it holds the loan amount for the borrower to disburse. The interest on the loan is not charged until the loan has been disbursed, so that the bank holds the money without deriving any benefit from it. The commitment interest is a kind of custody or parking fee for loan amounts not yet drawn down.
Good to know: commitment interest is not included in the effective interest rate calculation. Nevertheless, interest rates can significantly increase the cost for borrowers. In particular, builders who do not draw down the loan in one lump sum should keep this in mind when comparing different offers.
How are calculated commitment interest?
The lenders usually charge the commitment interest monthly. The usual interest rate is 0.25 percent per month, which is 3 percent p. A. Makes up. Other conditions are also possible depending on the provider. Interest is charged on the loan amount that has not yet been drawn down.
What does a commitment-free period mean??
Most banks offer a certain period in which no commitment interest is charged. The terms differ between providers and range from 1 to 12 months, with some banks even up to 2 years are possible.
The following table shows what costs you can expect for a loan over 200.000 euros, which is disbursed in installments:
|Month||loan amount not drawn down||payment||3 months provision interest free, thereafter 0.25% monthly.||6 months free of commitment interest, thereafter 0.25% per annum.|
|3||€ 160.000,00||€ 40.000,00||–||–|
|4||€ 120.000,00||€ 40.000,00||€ 300,00||–|
|5||€ 70.000,00||€ 50.000,00||€ 175,00||–|
|6||€ 70.000,00||–||€ 175,00|
|7||€ 60.000,00||€ 10.000,00||€ 150,00||€ 150,00|
|8||€ 40.000,00||€ 20.000,00||€ 100,00||€ 100,00|
|9||€ 20.000,00||€ 20.000,00||€ 50,00||€ 50,00|
|total||€ 950,00||€ 300,00|
There is a clear difference in the expenses for commitment interest: while the borrower pays 950 euros for a commitment-free period of 3 months, it is only 300 euros for a period of 6 months. If the bank grants even 12 months without charging commitment interest, the borrower in this example pays no interest.
In addition, during the payout phase, interest accrues on the loan amounts already drawn down. This means a double burden for the borrower. The agreed repayment does not start until the loan has been fully disbursed.
How long must commitment interest be paid?
The bank charges commitment interest as long as the loan is not yet fully disbursed. If a new building is delayed, this leads therefore in the worst case to a clear increase of the interest load.
Are commitment interest tax deductible?
According to a decision of the federal fiscal court in 2012, builders can claim commitment interest for tax purposes if the property is rented out after completion. The costs may only be taken into account for tax purposes as income-related expenses in the year of payment. Retroactively they can not be specified. If parts of the property are used by the owner, the interest for these parts may not be taken into account.
If you live in the property yourself, there is no possibility to declare these costs in the tax return.
Do I have a right to a refund if there are delays from the construction company?
If construction does not proceed as contractually agreed, commitment interest may be due in the event of delays. Whether you can charge the costs to the developer depends on how the contract is drawn up. If a corresponding point was included in the contract, the developer is obligated to refund.
How to avoid commitment interest?
Unfortunately, delays are usually unavoidable in the case of new construction. Since commitment fees can put a significant strain on your financial budget, prudent planning is key. Ideally, builders exhaust a variety of options:
- Negotiate with the bank a period as long as possible free of provision interest. Some lending institutions extend the deadline in exchange for paying an interest rate surcharge. Whether this is actually worthwhile, you should check carefully.
- Banks expect you to put your own capital into the construction financing first. Only then do the lenders pay out the borrowed funds. This procedure increases the probability of commitment interest. Negotiate with the bank and agree not to put your equity, or at least some of it, into the venture until the end.
- Schedule the loan borrowing so that the commitment interest-free period begins as close to the start of construction as possible.
- Opt for a provider that offers a long period without commitment interest anyway. If the period is 12 months or even longer and construction is progressing as planned, no additional interest payments may be due.
- Finance with several loans. For your construction project, first call up the loan amount from the bank with the shortest period free of provision interest. The loan with the longest term let you pay off last. Use the payment schedule of the developer for planning, which shows you when which installments are due.
- Try to realize the construction project in as short a time as possible. Rely on experienced companies for this.
Conclusion: avoid commitment interest with clever planning
With a building project a disbursement of the loan in a sum is not possible. The lender pays out the loan earmarked according to the construction progress. If the construction phase is protracted, the bank charges commitment interest for holding the loan funds.
For most banks, they are 3 percent p. A. And are thus significantly above the currently valid capital market interest rate. Over a longer period of time, the additional interest therefore develops into a considerable cost factor, which you as a builder should definitely take into account.
With skilful planning and a little negotiating skill, you can either avoid the additional interest charge altogether or at least reduce it.