Buying land or saving more?

Hello dear community,

since we are now seriously considering purchasing a plot of land, I would like to ask for your opinion.

Starting point:

My partner (29 years old), daughter (one and a half years old :) and I (29 years old) naturally want to own a home. Since we have just finished our studies and haven't been working for long, there is practically no equity available. My partner would prefer to build a house sooner rather than later. I am against it in the current situation. In my opinion, the lack of equity and the low incomes are not sufficient to sensibly finance a home or even to get a loan at all.

In view of probably rising interest rates again, it also does not seem sensible to save purely equity. My idea would be to buy the plot now and continue to save equity until the income situation improves and enough equity is accumulated. In addition, we have already found our "dream plot" and availability is of course limited.

Financial situation:

Woman's net income: €1600, employee at a corporation, permanent contract (salary increases not regulated) Man's net income: €1700, public sector, permanent contract (13th salary, salary increase according to collective agreement)

Currently available after all deductions: €1000 (could be saved)

No ongoing loans (cars are paid off)

Equity €7000 = would then be used for the incidental costs of the plot.

Information about the plot:

450 sqm for €43,000, fully developed in a newly built residential area.

Question: What do you think of the idea of buying the plot + continuing to save equity? If yes, how should the loan be structured? Is full financing of house + plot possible/sensible?

Regarding our house preferences, it should be a turnkey house without a basement with 5 rooms and about 140 sqm. Own work would only be possible in the form of laying floors and tiles.

Thank you very much for your opinion

Hello Rüganer.

If you both really have the strong will to purchase a home & have already identified your dream plot, I would already acquire the plot now (e.g. finance it with a variable interest rate) & try, (as far as possible, you can best assess that) to continue saving equity on the side in order to realistically approach the financing of the house in the medium term.

7000€ equity is unfortunately not so great...
Under the given circumstances, that would be a classic 120% financing, which, given your incomes, is very likely not sensible to manage. (my opinion)

Is the family planning completed?

Best regards.

What do you think about the idea of buying land + continuing to save equity?

If you take out a loan of 45,000 euros with an interest rate of 2.5% p.a. and repay 1,000 euros monthly, you will be debt-free in 4 years. You will then have 0 (zero) equity in the form of cash and the debt-free land.

You can also insert other numbers into the above calculation; the trend will not change.

Is it THE dream plot? Are there any conditions (obligation to start building x months after purchase)? What ongoing costs arise from owning the land?

I would strongly advise against 120% financing for land and house today; in my opinion, you do not earn well enough for that, or building is too expensive.

By the way, dreams can change, land cannot.

Ultimately, from my point of view, you mainly need to ask yourself two questions, which have partly already been discussed here:

1.) Are you done with family planning, that is: Is it going to be just one child or will there be more? If your situation remains as it is, the income situation will be easier to calculate. However, if there are more children, the income situation will initially be worse due to parental allowance/child benefit and is unlikely to rise back to the old level later on (this is the case with most families; usually, one parent then only works part-time if there are several children).

2.) What costs will arise soon due to child1? I have no idea how high the daycare/preschool costs are in your area or what a possible all-day school charges. For comparison: Here in Bochum, we have to pay around €300/month for our daughter (2 years) for daycare contributions including meal fees. Of course, this depends on income, but at least together you already earn quite well, so your contribution could be similar. You should inform yourself about this, especially if, as asked under 1.), more children are planned.

If you can answer both points accordingly for yourselves (it stays with one child and the daycare costs are relatively low), I would indeed tend to recommend buying land with your income. Depending on how you assess your job security (under "corporation" as you wrote above, both Bayer and Karstadt fall, to take the extremes of the current job security), at least I would have a house construction calculation done at the moment. Interest rates can hardly get any lower. If you then build relatively cheaply, that can very well fit your current income.

But whatever you decide, please do yourselves a favor beforehand: Keep a household budget for three months. And really with EVERY expense. Also pay attention to payments that only occur quarterly/semi-annually/once a year and calculate them monthly. Only then can you really make a decision about how much installment you can afford (the bank will tell you what it thinks anyway).

And my last tip: Should you decide on financing (whether "only" the land or also the house right away), compare bank offers carefully. I advise – as a banker – to use a mortgage broker like Interhyp, Dr. Klein or Hüttig & Rompf, often you get better offers through them than directly from a bank (we had good experiences with Interhyp for our own construction financing in 2008 and currently in 2015/2016 with Hüttig & Rompf).

Take a close look at the contracts of the property: Often, in new development areas, the properties are subject to: start construction at the latest within 3 years, be completed within 5 years,...

Take a close look at the contracts for the property: Often, in new development areas, the properties are subject to a clause: Start building within 3 years at the latest, be finished within 5 years,...

Exactly. That is probably the crux. Otherwise, there is nothing against the current purchase. However, I would delay building for a long time. No equity and low income speak against it. You surely don't want just an 80 sqm bungalow :)

We did it similarly. Financed €200k for the property, but fixed for 5 years (under 1% interest). Then you can repay/save quite calmly. If the property is then in a good location, it carries little risk since you can sell the property again at any time.

Best regards, Steffen