Construction loans and construction credit: financing new builds and project purchases

A construction credit is a temporary credit facility that lets you pay contractors and buy materials as the build progresses. In other words, you do not have to raise the full construction sum all at once. The money is released as the work is carried out, so your cash flow follows the building process instead of being tied up in one large sum from day one.

A construction loan is used for building, renovation and payment in stages, and the bank takes security in the property, in the project itself and in any guarantees. The credit is time-limited, and once the build has been reported as complete, it is typically replaced by a mortgage loan (realkreditlån), which takes over the long-term financing.

Before the construction credit is granted, the bank will normally want approved drawings and a building permit in place. There must also be a finalised building contract or firm quotes from the contractors, so the bank can see who is building what, and at what price.

Your finances must be able to cope with the fact that reality rarely turns out quite as planned. That is why a construction budget must include a contingency for unforeseen expenses, and there must be a schedule with expected milestones. The bank uses exactly these details to assess whether the project adds up.

The credit assessment does not look only at the property. The bank also asks for information about your own funding, the expenses you have already paid and the expected value of the property once completed. All of this affects how much you can borrow, and on what terms.

The rest of this article takes you through the requirements one by one, so you know what you need to have in place before you apply, and how the switch to a mortgage loan works once the build is finished.

Requirements for the building contract and budget with a construction credit

The bank does not read your building contract to judge whether you have got a good deal. It reads it to see whether the project can be completed at the price and within the time on which the construction credit is based. That is why the bank’s requirements for the contract are also about how precise and binding the description of your project is.

A solid building contract should include:

• A clear description of the work with the related schedules

• Payment terms and the overall budget

• Quality requirements and guarantees

• Liability and rights in the event of errors, defects and delays

The payment plan should be built up in instalments based on work actually delivered, in other words progress valuations (stadeopgørelser). As the client (bygherre), you should never pay in advance, either for the start-up or as a general advance payment. Otherwise, you carry the risk if the work is not carried out. The instalments must follow the work that has actually been delivered, not the work that has been planned.

The contract must state that the price is fixed and not an estimate. Do not leave that wording to the contractor. An estimate leaves the door open to later adjustments, and then the basis for the construction credit falls away. The contract sum must be stated both excluding and including VAT and be adjusted for the add-ons and omissions you have agreed on.

Getting things in writing is crucial throughout the build. No extra work may be started or paid for without a prior written supplementary agreement approved by you as the client. A verbal agreement with a tradesperson on site is not something the bank can rely on, and it is hard to prove if you later disagree about what was agreed.

Guarantees with a construction credit in Denmark

Guarantees exist because a building project is an agreement between two parties who do not know each other’s finances particularly well. The contractor wants to be sure of getting paid for the work, and you as the client want to be sure there is money to claim if something is not done or turns out to be defective.

The contractor’s guarantee under AB-Forbruger

If you are building as a private individual, the agreement is often based on AB-Forbruger, the general conditions for building work for consumers. The conditions apply when they have been agreed, and any departures from them must be stated clearly and expressly in the agreement. AB 18, which you may come across, is designed for agreements where the client is not a consumer, and has different rules on guarantees.

Under AB-Forbruger, it must be agreed if the contractor is to provide security. If it has been agreed, and the agreement says nothing else, the security is a bank guarantee or surety insurance for 15 % of the contract sum. It must be provided no later than 8 working days after the agreement is made, and it expires 1 year and 30 days after the work has been handed over. Security for extra work must be agreed when you agree on the extra work. If you want a larger or longer guarantee, it must be written into the agreement.

If you want money paid out from the guarantee, you must write to both the contractor and whoever provided the guarantee, stating your reasons and the amount you are claiming. The money is paid out within 20 working days, unless the contractor asks before then for an expert appointed by Voldgiftsnævnet (the Danish Building and Construction Arbitration Board) to assess whether the claim is justified.

Client guarantee: the other side of the agreement

The contractor may want you as the client to provide security for payment. Under AB-Forbruger, this must also be agreed. If it has been agreed, and the agreement says nothing else, the security is a bank guarantee, which must be provided no later than 8 working days after the agreement is made. It covers the full payment, but if the work lasts more than 3 months, it covers 3 months’ average payment. You can at any time require the guarantee to be reduced to the amount still outstanding for the agreed work.

If the contractor wants to draw on the guarantee, the contractor must write to you and the bank, stating the reasons and the amount. The money is paid out within 20 working days, unless you ask before then for an expert to assess the claim. So avoid an unconditional on-demand guarantee, where the contractor can draw on the guarantee regardless of your objections.

Financing an off-plan purchase with a long wait until handover

When you buy an owner-occupied flat that has not yet been built or completed, it is an off-plan purchase (projektkøb). You sign for a home you can only move into later, and the money does not have to sit with the seller in the meantime. With an off-plan purchase, you typically pay a down payment of about 5 % of the purchase price when you sign the purchase agreement. You only pay the remaining amount on handover, and the bank provides a guarantee for it. This gives the seller security that the money will come, without you having to raise it in advance.

With an off-plan purchase and a long wait until handover, you commit to a price now but pay most of it much later. This is exactly where the financing differs from an ordinary home purchase. You need your financing in place both at the binding agreement stage and during construction, because it takes time before there is even a finished home to borrow against.

Such a process often stretches over 1½-3 years from purchase agreement to handover. During that period, your money is tied up without you being able to move in, and if you still live elsewhere, you may end up paying double housing costs for part of the time. The wait also affects what the guarantee costs, because it often has to run until the money can be released. The longer the gap between signing and handover, the longer the guarantee stays open.

The content of the purchase agreement is what determines whether the process holds together. It should contain a clear description of the price, payment deadlines, handover date, conditions and any deposit. A point is only truly settled when it is clear what needs to be done, who is responsible, what deadline applies, what documentation must be in place and what the consequence is if it does not happen.

Your ownership is secured when the deed is registered (tinglysning, registration of title), which normally happens before the handover date and before the purchase price is released. As the buyer, you usually pay the registration fee yourself.

There are also a couple of deadlines you must not overlook. As a consumer, you can, as a rule, withdraw from the purchase within 6 working days of entering into the purchase agreement. Normally you have to pay the seller compensation of 1 % of the purchase price, but not if the seller built the home with a view to selling it or sells property as their main business, which is typically the case with off-plan sales. A lawyer’s approval clause (advokatforbehold) is also often agreed, typically with a deadline of 6 working days, to have the terms of the agreement reviewed. If that deadline expires without objections, you are, as a rule, legally bound. Read everything carefully during that period, because afterwards there is little to fall back on.

The risk does not end at handover. When a second-hand home is sold, the seller can be liable for hidden physical defects for up to 10 years, unless the seller has used the home inspection scheme (huseftersynsordningen) with a condition report, an electrical installation report and an offer of change-of-ownership insurance. In off-plan sales of owner-occupied flats, the seller’s liability is in practice often limited to 5 years after the handover date. Purchase agreements also often include provisions allowing the seller to remedy minor defects only at the 1-year inspection and not necessarily immediately after handover. Before you sign, you should therefore look into the developer’s financial background and previously completed projects. If the developer goes bankrupt, the project may be halted, leaving you with an agreement for a home that never gets finished.

How to convert your construction credit into a mortgage loan on completion

The completion notice sets the conversion in motion. Once the build has been reported as complete, the construction credit is typically converted into a mortgage loan, because the construction credit was never meant as a permanent solution. The mortgage credit institution values the finished home, and when the mortgage loan is paid out, the money is used to pay off the construction credit at the bank.

The next thing to get right is the loan-to-value ratio. The mortgage loan can be at most 80 % of the value the mortgage credit institution puts on the finished home. The rest is covered by a bank loan and your own savings, and your own down payment must, as a rule, be at least 5 %. The split matters for how much of your financing ends up on the cheaper mortgage loan, and how much remains as more expensive bank debt.

If you take out the mortgage loan at a price below 100, you incur a price loss, so the outstanding debt ends up higher than the amount paid out to you. On top of that come fees to the bank and the mortgage credit institution, the price spread and brokerage, plus the registration fee to the state. In 2026, the fee is 1.825 kr. plus 1,25 % of the loan’s principal. You do not pay the percentage part on any amount already registered as a charge on the property, such as an owner’s mortgage deed (ejerpantebrev) the bank has received as security for the construction credit, when the old charge is cancelled. If the bank instead holds security in an indemnity mortgage deed (skadesløsbrev), you do not get that discount.

Your plan from construction credit to final mortgage loan

A building project rarely succeeds because a single agreement is in order. It succeeds because the agreements fit together: the contract matches the budget, the guarantees match the contract, and the financing matches the whole process up to the point where the construction credit is replaced. Four things should be in place before the first sod is cut.

• Plan the whole process from contract to conversion, so that the building contract, budget, guarantees and financing agreements fit together and the construction credit can be converted without unnecessary fees.

• Get an independent review of the purchase or building agreement, including payment terms, deposit and deadlines, so you do not tie yourself to terms you cannot fully assess.

• Assess your overall finances over the full term of the loan, and factor in price loss, set-up costs and the registration fee, not just the monthly payment.

• Get an overview of your own obligations as the client, including the client guarantee for a new build, and make sure they are in place before construction starts, so both the bank and the contractor have confidence in the project.

The point of calculating over the full term rather than just the monthly payment is that the costs are not spread evenly. Brokerage, set-up costs, the registration fee and the price spread hit at different times, and any adviser’s fee comes on top. If you only look at what the loan costs per month, you can easily overlook the items that hit you when they fall due.

The bottom line

A construction credit that is planned from day one costs you both less money and fewer worries. Because the requirements for the contract, budget and guarantees have already been met, the credit can be converted cleanly on completion, without you having to find financing at the last minute or pay for a refinancing that could have been avoided. That is the difference between a process full of loose ends and a project you can follow calmly from agreement to handover.

The next step is not to sign anything. It is to get the figures on the table. Talk to your bank about an overall financing plan, so you know what your project can carry and what the path from construction credit to mortgage loan looks like for your particular finances. Brikk can also put you in touch with a lender. Read more on Brikk’s home loans page.