Building a house financially feasible or a pipe dream?

For me, quite a few things here are really unclear. You say the pension is tight but there is enough for vacation and a car... strange. You took out a loan in 2011 with a short term for over 4%... why so high? Somewhere there are really several things unclear to me. And this:

Auch bei uns - wieso ich für mein "Dasein" bei der Bank mit 800€ monatlich, aber jede weitere Person im Haushalt für nur 200€ veranschlagt werden, werde ich niemals verstehen.

It’s more than easy to explain. There are overhead costs that don’t really change much, no matter how many people are in the household.

One must say that the flat rates tend to be much too low. In this respect, it is in the interest of the new debtor who is about to overextend themselves. Therefore, caution is also advised regarding maximum financing amounts, as they are often much too high (calculated with minimal repayment and very short terms). But there are different kinds.

Hm... I also see some rosy calculations from the OP as well as from other commenters.

If I read it correctly, after selling the house and paying off the old debts + possibly taxes, there would be just enough money left to pay for the parents' new granny flat in the new house.

So simplified calculation: The OP has to finance 100% of the living space for himself, his wife, and 3 children. At that point, I no longer consider "ambitious" the right word. Due to the parents' right of residence, the fictitious equity is used up before a single brick for their own living space is laid. Personally, I would put the new construction plan in the round filing bin.

Buying old stock can be cheaper, provided a suitable offer can be found.

As much as the issue of the parents' right of residence is understandable on a human level, economically the deal is a disaster. The OP took out 200k to renovate. So in the end, 200k was "paid" for a house with an occupied apartment that generates no rental income. And this apartment even has to be carried along in the new building. The resale value relative to the remaining debt is also not as great as it is portrayed here.
Sure, the story sounds nasty since it involves the parents. But it’s true anyway.

Now that more space is needed for the children, the concept shows its economic weaknesses.

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Personal anecdote:

I have already seen two marriages break up in my (extended) circle of acquaintances due to similar constructions - there, too, the parents' house was to be "saved" at all costs by transfer of ownership - naturally with a right of residence until death. From then on, they were economically trapped, children came along, and the parents lived healthily longer with no death in sight. And the house repeatedly required money due to its age. That’s when things heated up.

I have already told my parents that if their house ever gets too big for them, they should just sell it and move into a suitable apartment - independently. I consider that healthier for their own private life by far.

That is my purely personal opinion, and of course, others are free to see it differently.

For me, quite a few things here are really unclear. You say the pension is tight but there is enough for vacation and a car... strange. You took out a loan in 2011 with a short term at over 4%... why so high?

Some things are really unclear to me.

And this:

That is more than easy to explain. There are the overhead costs which don’t really change much regardless of how many people live in the household.

What someone means by "tight" is always individual... They have enough pension to feed themselves, cover additional living costs, maintain a car, and, through financing, get a new car every 5 years... it is enough to go away for a week once a year, which in my opinion is still far too little in old age. It is enough to buy grandchildren something once in a while, and simply live a normal life at home...

It is not enough to pay an additional €300 rent, then there is no more vacation or driving a car. And it is not enough, or just breaks even, if I include them as household members with pension income in the financing, and then have to calculate my household with 6 instead of 4 (or soon 7 instead of 5) people.

Why so high? The interest rate? Because in 2011 it was probably market standard with a loan-to-value ratio of almost 80%. That’s why there was a short fixed interest rate period, so I would still have options as early as possible. I already have offers from the bank today for a follow-up financing with a forward loan. But those do me no good, because the bank will not give me any more money for the extension, so I will have to switch banks anyway – to one that properly appraises the house, that will potentially lend more than 80%, and that will finance my extension.

The banks’ figures are still completely unrealistic... That might serve you as a reference, but if I can present a household book for 10 years without gaps, showing where my money comes from and where it goes, then that should give the banker – if he wants – much more "security" than any number that lacks any foundation.

What someone means by "tight" is always something individual... They have enough pension to provide for themselves, to cover the ancillary housing costs, to maintain a car, and through financing also to get a new car every 5 years... it is enough to go away for a week once a year, which in my eyes is still far too little in retirement. It is enough to occasionally buy something for the grandchildren and to simply live normally at home...

It is not enough to still pay €300 rent, then there is no vacation or driving a car anymore. And it is not enough, or breaks even, if I include them as household members with pension income in the financing, and then have to calculate my household with 6 instead of 4 (or soon 7 instead of 5) people.

With all due respect, I have rarely read anything like that. So your parents can buy a new car every 5 years but actually have no money to pay a local market rent. Incredible! You have to let that slowly sink in and then laugh. Sorry, but something is definitely wrong with you.

Why so high? The interest rate? Because it was probably market standard in 2011 with a loan-to-value ratio of just under 80%. That's why the short fixed interest period, so I still have options as early as possible.

That would surprise me and definitely must have other reasons. We bought an apartment in 2011, 15 years fixed interest at 2.66% (with a higher loan-to-value and only one income).

The bank figures nevertheless lack any reality...

How do you come to that? Just take a look at what the Federal Statistical Office publishes for living costs.
And why should he believe your household budget? You yourself said that if the money is tight, then the parents-in-law just pay the car insurance. So, something seems to be seriously wrong somewhere or you are "lying to yourself."

You CAN pay rent - then there simply won’t be any more money for a car and vacation because the money isn’t enough for those - what’s so hard to understand about that?

You DON’T HAVE TO pay rent to me because I know how hard they have worked in their lives, also to enable me to go to school, university, etc. - and I see how modestly they have to live today, although both of them have worked for over 45 years except for times spent raising children, and still don’t get a proper pension... I want to give something back to them for the fact that I lived at home for free until I was 28 while studying.

How many academics come from non-academic families? Few. I was able to overcome this hurdle thanks to my parents. That is also worth something.

I don’t know what kind of experience you have, but there is currently a heated discussion about the fact that people who had to work for so long almost suffer from old-age poverty at the end... It hasn’t come that far with us—because they don’t have to pay rent.

If I had not taken over and renovated the house, it would be paid off today (for about 1-2 years now), but the heating would be broken, heating costs significantly higher, etc...

They wouldn’t have to pay rent, but they also wouldn’t live in a livable environment—or they would have sold the house and looked for something smaller—which I would almost rule out having happened.

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So maybe 4.09% wasn’t the best interest rate back then. But it was still usual.

In July 2011 (contract conclusion), the average interest rate for a 10-year term was 4.05%.

After that, interest rates dropped sharply, so that 2.66% was maybe “usual” at the end of 2011.

Back then I had 3 offers, and all were above 4%.

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Unexpected income like that is also recorded in the household book, and all necessary expenses as well, even if they were paid “externally.” I am simply not lying to myself about that...

My statement also referred to the fact that IF there ever was an emergency, the grandparents WOULD step in. They wouldn’t then give us a weekend at a wellness hotel for €350, but 400€ for the car insurance. But so far, we have never been dependent on such help.

And before it’s misunderstood again—we are talking here about my wife’s parents, not mine who live in the house.