Mortgage for a construction

Do you have a real estate construction project? Single-family house, rental building or even commercial property, you need customized financing. The construction mortgage is the ideal solution. But beware, this type of loan is more complex than a traditional mortgage. Rates, amounts, fund release, consolidation — we explain everything so you can see clearly and get the best deal.

Projects financeable with a construction loan

The construction mortgage applies to all new real estate projects or major renovations:

• Construction of a single-family house or villa
• Construction of a residential or mixed-use building
• Construction of a commercial, industrial or agricultural building
• Complete renovation of an existing property
• Extension or raising of an existing surface

Unlike a traditional mortgage, the loan is released progressively according to the progress of the work. It thus finances the total cost of the operation, not just the purchase of the land or existing property.

Different types of construction loans

Construction account

This is the simplest form. The bank opens a credit line, usable according to financing needs. The borrower pays interest only on the amounts actually used. At the end of the work, the account is settled and converted into a traditional mortgage.

Construction loan

More elaborate, it releases funds according to a predefined schedule (generally 4 to 6 key stages). Each tranche is subject to a separate contract, with its own interest rate and duration. The advantage: a lower rate than a construction account.

Mortgage

For simple projects such as building a house, some banks directly grant a mortgage in a more traditional form. Funds are paid in a single lump sum at the start of the construction. The borrower must then manage the payment of invoices themselves.

Possible combinations

Banks often offer a mix of these different formulas, depending on the borrower’s profile and project characteristics. A bridge loan for purchasing the land, a construction account for project management, and a fixed-rate mortgage for the balance. The possibilities are numerous.

Conversion of construction loan into mortgage

Once the building is completed and equity injected, the construction loan is converted into a long-term mortgage. Three options exist for this key step:

Classic consolidation

The construction loan is entirely replaced by the mortgage, in one single step. This is the simplest solution, but not always the most advantageous because you lock your rate immediately. If rates drop after consolidation, you won’t benefit. A single consolidation also locks the repayment method.

Deferred consolidation

The mortgage takes over the loan in successive stages. This allows keeping the advantageous construction loan rate longer. But be careful to negotiate the steps well.

Partial consolidation

Only part of the loan is consolidated, the remainder stays in the construction account. This formula offers great flexibility but requires rigorous monitoring. It suits experienced investors.

Another flexible option is the combined mortgage, mixing fixed and variable rate tranches.

The consolidation method determines the final loan cost and future leeway. Expert support is therefore recommended to make the best choice.

Impact of interest rates on construction mortgage

Total cost of the operation

As with any loan, the level of Swiss mortgage rates is crucial. But the share of interest in the overall cost is higher for a construction mortgage, around 0.2 to 0.8 points.

• Long duration of the works (often 12 to 36 months)
• Progressive release of funds
• Deferred capital repayment until consolidation
• Higher risk taken by the bank

An additional cost to be integrated from the initial financing plan. Unless opting for a SARON mortgage, indexed on short-term rates.

Need to adapt the schedule based on rates

The construction mortgage introduces a dual temporality. That of the project (land purchase, building permit, tenders, works), and that of the financial markets (rate trends, credit availability).

To optimize financing, both must be synchronized. Which implies:

• studying short- to medium-term rate projections
• adapting the fund release schedule
• negotiating capped rates or exit options
• arbitrating between different consolidation scenarios

Advantages of a construction loan compared to a traditional mortgage

Security for the borrower

Guarantee provided by the mortgage

The construction mortgage offers the same guarantees as a traditional mortgage. The property under construction serves as collateral. In case of payment default, the bank can seize and sell the property to recover its claim.

Precaution for unforeseen events during construction

The bank requires the builder to take out all-risk construction insurance (fire, theft, natural damage). It also verifies that the budget includes a margin for contingencies of about 10%. Enough to absorb inevitable cost overruns.

Financing flexibility

Mortgage adaptation to project needs

The construction mortgage is a modular product. Each credit line (land, works, consolidation) can have its own characteristics: amount, rate, duration, amortization, etc. This allows precise adjustment of financing to project needs.

Early repayment options for amortization

A classic construction loan must be fully amortized from consolidation (generally over 15 years). But many banks offer to convert it into a fixed-rate mortgage with options for early or deferred amortization. Allowing monthly payments to be adjusted to the borrower’s financial capacity.

Financial support during construction

Monitoring financing during works

The banker does more than just release funds. He monitors the progress of the site and checks that the budget is respected. He can also assist the project owner with tenders and negotiations with craftsmen. A true daily partner.

Revision of conditions in case of project changes

A real estate project is never a smooth ride. Deadlines, costs, unforeseen events… Parameters constantly evolve. The construction mortgage allows reviewing financing conditions along the way (subject to bank approval). An asset to secure the operation.

Obtaining a construction mortgage loan

Maximum amount that can be borrowed

As with any mortgage, the construction loan amount is capped at 80% of the property’s value (land + building). The remaining 20% must be provided as equity (including at least 10% in cash).

For properties under construction, the value considered is the “execution cost”, that is, the total of invoices. This amount serves as the basis for the collateral calculation. Be sure to prepare a comprehensive and realistic estimate.

Note: the bank reserves the right, at the end of construction, to revise the loan amount if actual costs are lower than the initial estimate. A budget overrun can therefore put the borrower in difficulty.

Comparison of market offers

Credit conditions vary greatly from one institution to another. Rate differences often exceed 50 basis points, or 12,500 CHF more interest on a one million loan amortized over 15 years!

Other parameters come into play:

• Method of fund release
• Terms and cost of consolidation
• Early repayment options
• Required risk coverage
• File and management fees

A systematic competitive bidding is essential. And not only based on the displayed rates. Only a real estate financing expert can provide a relevant comparison, after analyzing the project.

File preparation and approval

Obtaining a construction loan can be challenging. Many documents are required:

• Detailed project description
• Estimated cost breakdown by item
• Projected work schedule
• Signed company contracts
• Building plans and construction permit
• Standard documents (ID, income, equity)

The approval process varies between 3 and 6 months, and you often have to complete or amend your file. Or even turn to another institution if refused. The help of a mortgage broker is therefore valuable, as they know how to highlight the right arguments with banks and avoid mistakes that could jeopardize your financing.

Need advice?

Contact our experts and get the best mortgage!

We know that finding the ideal solution for your real estate project can be complex. That’s where our experts come in!

By using our services, you benefit from:

• Tailored support to optimize your financing
• Better negotiated conditions with our partners
• Time savings and more peace of mind to realize your project

Contact us now to benefit from our advice or do an initial online simulation with our mortgage calculator. Your real estate project starts here!