Mortgage or Construction Loan? What You Need to Know
ResourcesguideConstruction and Real Estate LawMortgage or Construction Loan? What You Need to Know
Construction and Real Estate Law 
9 min. Lesedauer
04. September 2025Building a home or buying a condominium is something many people aspire to. However, very few have the necessary equity to handle these matters on their own. For this reason, many homebuilders or homebuyers take out loans. This allows them to gradually repay the money they invest. Two of the most important types are construction loans and mortgages. But how do the two actually differ?
What is a construction loan?
A construction loan is a special type of loan, usually granted by a bank. This type of loan is specifically designed for construction projects – regardless of whether it’s a new build or simply a renovation. With a construction loan, the builder doesn’t have a specific amount at their disposal, but rather a variable amount up to a maximum (the credit limit).
This is a so-called overdraft facility. The invoices for the companies involved in the construction, architects, and other creditors are paid directly from the construction account. Available equity is also paid into this account – this is used first to pay the invoices. Once the capital is exhausted, the construction account continues to be debited, but then the construction loan is drawn down. This involves the payment of interest, and a construction loan commission or commitment fee is often due.
A construction loan only exists as long as the project is under construction. After that, most lenders will convert it into a mortgage. In rare cases, the bank will reject a conversion—this can be the case, for example, if the construction loan limit is significantly exceeded during the course of the project.
Mortgage – definition and description
Homebuyers can always take out a mortgage if their equity is insufficient – provided the lender considers the applicant creditworthy. This check examines the expected monthly income and how this compares with maintenance and utility costs.
When purchasing a property, buyers must contribute at least 20% of the purchase price themselves. The remaining 80% can be covered by a single mortgage. Lenders typically do not issue a single mortgage for such a large amount, but rather split it into two mortgages with different interest rates. The first mortgage usually covers up to 65% of the purchase price and has a lower interest rate; the second mortgage covers up to 15% (i.e., a total of 80% of the purchase price) and has a higher interest rate. This provides a certain degree of security for the lender, because the higher the mortgage, the greater the loss in the event of a loan default.
In general, several types of mortgages are common alternatives when purchasing real estate:
- Fixed-rate mortgage: Both the term and the interest rate are determined in advance.
- Variable-rate mortgage: The term of this mortgage is just as variable as the interest rate. The interest rate is ultimately determined by the bank as the lender, although it is usually based on the money market.
- Money market mortgage: This type of mortgage is also called a SARON mortgage – primarily because its interest rate is based on the reference interest rate of the same name. The term is usually variable.
The mortgage is a real estate lien. The real estate lien is regulated by the Swiss Civil Code starting with Article 793 of the Swiss Civil Code. Accordingly, it can take the form of a mortgage bond or a mortgage certificate and must be registered in the land register. The land or property thus serves as security for the lender that the loan will be repaid.
Differences between construction loans and mortgages
A construction loan is explicitly intended for construction projects where the total costs are not yet known at the outset. A mortgage, on the other hand, is issued when a person wants to purchase a finished property – this assumes that the purchase price is already known at the time the mortgage is issued. This eliminates any uncertainty regarding the amount of the loan.
A construction loan is also strictly earmarked for a specific purpose. The settlement of claims from construction companies, subcontractors, and architects is handled directly through the construction account. This also results in stricter monitoring than, for example, with a mortgage.
In these points the two forms of credit are similar
The requirements for obtaining a construction loan or mortgage are similar: In each case, the lender (usually a bank) checks whether the individual is likely to repay the borrowed money. To do this, the institution considers the applicant’s income and their living expenses. Based on these calculations, the individual’s affordability is calculated and the decision is made as to whether and how much money will be loaned.
Taking out a construction loan or a mortgage – which is better?
Ultimately, it always depends on the type of project. And the amount of capital required can also influence the choice of loan. For new construction projects and major renovations, a mortgage is generally not granted at all. If the total amount is unclear, it always ends up being a construction loan.
A construction loan is not limited to a specific amount, but rather a maximum limit. Interest is therefore only charged on the amount actually needed. A construction loan also offers certain safeguards: The bank checks incoming invoices and ensures that the money is actually used for its intended purpose – construction.
On the other hand, a construction loan usually comes with higher interest rates than a mortgage. These are usually not only variable but also opaque. In addition, in most cases, a construction loan commission is added, which increases the costs even further. Especially towards the end of the project – the higher the construction price – the interest on the construction loan also increases.
Exception: For some new buildings, a mortgage is also possible instead of a construction loan. This is the case when a general contractor is responsible for the entire construction project. This contractor can determine the total costs and when partial payments are due even after the planning is complete. This provides the lender with additional security that is otherwise not available with a new building.
Construction loan and mortgage in the same project – is that possible?
There is no strict requirement that builders limit themselves to one of the two types of loans. In some cases, it may make sense to use both forms of financing for a project. For example, if the interest rate on the construction loan is likely to rise toward the end of the construction project, a mortgage can be applied for. The mortgage can then be used – depending on the situation – to pay additional bills or be added to the construction loan as credit.
Some banks also allow the gradual conversion of the construction loan into a mortgage. If in doubt, seek expert advice and inquire with your lender about the possible options.
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FAQ: Construction loan or mortgage?
A construction loan is an overdraft facility granted for new construction or renovation projects. The construction account is directly debited with the ongoing invoices incurred during the construction project. There is no fixed amount; instead, a maximum credit limit is set.
With a mortgage, a person borrows a certain amount from a lender to purchase a property or land. The purchased property serves as collateral that the loan will be repaid later.
Both loans are issued by banks. Applicants are assessed for affordability in each case, allowing lenders to determine whether repayment of the loans is likely.
Interest rates on construction loans are generally higher – they are usually comparable to the interest rates on variable-rate first mortgages. However, a construction loan can become more expensive, especially in the final phase of a project. Furthermore, these often involve uncertain amounts and large sums. Of course, the final cost of a loan also depends on the scope of the project.
If a fixed sum is agreed upon for the entire project at the outset, a mortgage can often be taken out. This is especially the case if a general contractor is handling the entire project. They can set the prices right from the start.
After the construction project is completed, a construction loan is usually automatically converted into a mortgage by the bank. The total amount then remains unchanged.
Yes, in principle, both a construction loan and a mortgage can be used as financing for the same project. This can make sense, for example, if the interest rate on the construction loan is likely to rise. Whether both are approved depends on the lender.
