What is a commitment fee?

The commitment commission (also known as the commitment interest) is the fee that a lender may charge on the parts of a construction loan that have not yet been called up. The reason for this is that in this time the money provided does not bring any profits, it is finally fixed.

When is there a commitment fee?

There are various situations in which the borrower is aware that he will soon need a loan, but the timing has not yet been determined. This type of credit is called call credit: The money is “called off” by the borrower at an indefinite point in time. It is conceivable that the borrower hopes for a price increase of his goods. The Bank incurs costs for the provision, which it pays via the provision commission. If the loan had been claimed immediately, the bank would have received interest immediately. There are two unknowns with the call credit: the time at which the credit is drawn down and whether the bank customer will need the credit at all. In the second case, the bank would remain stuck at its expense and therefore charge its customers a commitment fee. In the case of a call credit, the bank charges the commitment commission immediately upon its being granted.

Why are commitment interest paid?

As a rule, the construction of the house is not invoiced to the customer after completion, but in stages. Construction companies or craftsmen have to be paid at different times. The borrower therefore does not need the entire loan amount, but parts of the loan in stages. This results in less interest than when the entire loan amount is called up. The lender therefore holds parts of the loan for his customers and cannot otherwise make a profit from these amounts. The award of the contract The borrower compensates the losses of the bank. Provision interest is usually charged when the new construction of a property cannot be completed on time. The lender can therefore be compensated for keeping the money of the credit available for his customer for longer than previously agreed.

When does a commitment interest become due?

Whether a commitment interest is charged depends on the terms of the agreed building loan. Interest accrues immediately from the disbursement date of the building loan. The Bank shall charge this interest until the loan amount has been drawn down in full. As a rule, the borrower receives a pre-determined period of time until the commitment interest is added. The availability-free phase varies depending on the loan amount and can range from one month to 2 years. Some credit institutions extend this availability-free period against payment of a surcharge, while others strictly adhere to the specified period. You can avoid the commitment interest and agree with your lender to transfer the loan amount to a fixed-term deposit account when it is ready for disbursement.

The basis of calculation

The amount of the commitment interest is usually determined using two different methods.
a. The interest shall be calculated on the basis of the portion of the loan not yet drawn down.
b. Commitment interest is charged on the entire loan amount.
In most cases, the interest rate is two to three percent of the unused portion of the loan and is paid monthly.

commitment commission for a construction loan agreement, the following

Customers should take a close interest in the terms of the loan agreement before concluding it. Particular account shall be taken here of the amount of interest to be charged for the provision of services and the period of the interest-free period. The commitment interest is usually not calculated in the effective annual interest rate. For a borrower, commitment interest means additional costs that must be taken into account when financing real estate and taking out a construction loan. Often lenders are accommodating in terms of interest rates and the duration of the interest-free period. The borrower thus has a certain amount of room for manoeuvre in negotiations.

Is it possible to deduct commitment commission from tax?

Provision interest can only be deducted by the borrower for tax purposes if he does not live in the property himself after its construction, but rents it out. If this is the case, commitment interest is written off as part of the production costs. However, they may not be claimed retroactively in the form of advertising costs.