100% financing / liquidity

Hello everyone,

the following case:
We are facing the decision whether to rent a house or buy a house. In both cases, it is about a relatively central, very good residential area of a metropolis in Germany.

The cold rent would be approximately 3,000 EUR. For that, we get a detached house with about 180m² living space + garden.

If I now calculate what we could afford if we put the cold rent into financing interest and invest the current saving rate of 2,000 euros into repayment, I get quite dizzy with an assumed interest rate of about 1.5% on the total amount: That is something between 1.5 and 2 million.

The issue is, however, that if we want to buy something comparable to the rental example above, we have to think in these dimensions.

Although we have about 12,000 EUR disposable net income, we still find it hard to come to terms with taking out a loan of over 1 million, let alone 1.5 or 2 million. (We are a family with two small children)

So better to pay rent and, if in doubt, burn a lot of money?

I am aware that this is quite a luxury problem, nevertheless I am interested: What would you do?

Best regards, Anjin

Hello Anjin,

I can relate well.. similar income and a while ago we faced a similar question. It was about a really nice apartment in the city center for just under 3700 EUR cold rent.

For house construction, we need about 900k including land and additional building costs. So what did we do? Quickly saved up a lot of equity. This reduces the loan amount to a "manageable" 500k. We could also have fully financed everything.. but that was not an option. Additionally, I recommend a really big cushion (at least 100k) and mentally you only have 400k "debt" :)

Regards, Steffen

Hello Steffen,

thank you very much for the response.
Saving quickly and a lot of equity sounds good, I just worry that when I am finally ready, the currently super low interest rates might no longer be available. If the interest rates weren’t so tempting right now, I wouldn’t even be thinking about buying.

In this context, I find it somehow strange that the rent development is completely decoupled from the loan interest rate development. Rents keep rising (logical: analogous to the purchase prices of real estate), but that rents would fall analogously to interest rates: no way! After all, it’s not called RENT INTEREST for nothing, right?
Seriously, can someone logically explain that?

Regards,
Anjin

Hello Steffen,

thank you very much for the answer.
Saving quickly and a lot of equity sounds good, I just worry that when I am ready, the currently super-low interest rates will no longer be available. If the interest rates weren’t so tempting right now, I wouldn’t even remotely think about buying.

In this context, I find it somehow strange that rent price development is completely decoupled from loan interest rate development. Rents keep rising (logical: similar to property purchase prices), but the rent falling analogously to interest rates: no way! After all, it’s not called RENT INTEREST for nothing, right?
Seriously, can someone logically explain that?

Regards,
Anjin

You really don’t need to worry about that. Interest rates will not rise in the coming years. On the contrary... I bet on further falling rates. In 2012, everyone tried to convince me that interest rates would rise soon :)

The EU and the Euro are finished. Before interest rates rise... we will still experience helicopter money directly paid to everyone’s account :)

We will rather get a hefty inflation.. then you of course have to be quick. There's always something :)

I am aware that this is quite a luxury problem, but I'm still interested: what would you do?

That's true, it is a luxury problem. But you have to face one death – buying/building expensively and financing accordingly or renting expensively. Since you only have to use a smaller part of your income for the financing (with a Dr. in your nickname and the income, I assume a corresponding professional development), I would buy and finance. Many "low earners" are doing MUCH worse in terms of the income to loan obligation ratio.