Construction financing - mortgage instead of equity?

Tax officials should just be twice as careful with something like this. Difficult topic.

In my mind, the worst case is that one of us dies and the other becomes unable to work. That means he would have to live on his pension, then of course he could no longer afford the installment. But somehow you always have to live somewhere (so still pay rent)?

I think in that case I might be rather untypical for civil servants and pragmatic – if we can no longer afford the house, we have to sell or rent it and pay the installment from the rent. Nothing helps. And paying off the house would of course have the advantage of tying up capital. The houses are currently not necessarily getting cheaper.

For the case of death, one could take out a term life insurance in the amount of the loan liability. Costs a few euros/month.

One thing is the case that you can no longer service the loan for various reasons. Quite a bit has already been written about this. How big the risk is, you have to judge for yourselves. Two cases I have seen much more often in practice:

- Divorce/separation
- Parents want/have to sell their little house

Both are not particularly elegant to solve and can occur at bad times.
What do you do if you separate in a few years, neither can bear the payment alone, and the house cannot be sold at a price that covers the loan amount plus costs? (There are a few more separation scenarios that are problematic).
Also keep in mind that from that point on your parents are not free to dispose of their house. No matter the reason, care, desire to emigrate, no longer wanting to, whatever... Your parents always have to ask your bank.

And the relationship with the parents can also change. Not necessarily, but many have said: "I know my parents." That doesn't mean you immediately fall out... but you wouldn't be the first to eventually feel that—of course totally unjustified and just as a retaliation because they refuse to follow the rule that your children/their grandchildren don't get new toys/chocolate/etc. every time they are at the grandparents'.

None of this has to happen... but one should consider why am I taking these risks?

Because it can't be done otherwise? Or because I want to save 1/10 interest?
Would my parents also have the money lying around in their account anyway?
Is it the parents' owner-occupied property? Or the sixth unencumbered rental property?

Another horror scenario: parents die and a dispute starts with the heirs over the utilization of the property. Additional fees for the mortgage registration also apply for the entire process.

I would do it like nordanney wrote. Parents mortgage their house, e.g. €100,000, and lend it to you privately. Make a loan agreement (which is fair towards possible co-heirs) with, say, 0.3% interest. That roughly corresponds to the interest on a daily money account. You also pay it dutifully and the parents declare it dutifully or use exemptions. That’s peanuts per year. Whether they “return” the interest to you in the form of a nice invitation to an Italian restaurant is really no longer traceable. In any case, the amounts would be absolute trifles. In the worst case, the unpaid or too low interest is a gift, which is easily covered by the applicable exemptions.

You take this as equity to the bank and thereby reduce the loan-to-value ratio accordingly. And yes, that pays off; between 100% and 80% you save tens of thousands of euros over the years.

Thank you for all your answers – now I know a bit more.

I will talk again with my parents and also with the man from Interhyp.
What I don’t quite understand yet:
If my parents lend me money (with the mortgage on their house, without it will probably be difficult due to their age and I don’t want them to sell their shares in the business) and I pay them back and I can no longer afford it, then my parents ultimately have the same problem, assuming they can’t pay the installments, right?

I completely understand all your concerns, but to me it sounds like financing a house is overall a pretty stupid idea, things can always happen (by the way, there is already term life insurance in place!). That does make you a bit scared. I actually estimate our risk as minimal, since we are really well protected through our pension, disability insurance and family allowances.

But then I will make a proper breakdown for all worst-case scenarios! Thanks so far!

With a private loan, you are the debtor of your parents. If you can no longer pay or do not want to pay, they could simply let it be. If they want to collect the claim, you can agree on an adjustment of the installment, suspend the installment, or so on. In the worst case, you go into private insolvency and your house is gone. If your parents' house is directly encumbered by your bank and you no longer pay the bank, they can enforce the house of your parents. That is a completely different perspective.

I fully understand all your concerns, but to me it sounds like overall a pretty stupid idea to finance a house; something can always happen (by the way, a term life insurance already exists!). That really makes you a bit scared.

No no, don’t get me wrong. I think it’s great to finance a house. You just have to be aware of various risks and, if desired, cover yourself with insurance. And you should be aware that under certain circumstances like separation, alimony payments, etc., it simply might no longer be possible to keep the house alone and it has to be sold. That’s just how it is.

From this perspective, a full financing is totally okay, but there is the additional risk that in the case of an (emergency) sale in the first years you’ll be left with a mountain of debt. That’s the contrast to having sufficient equity. The equity might be gone then, but after the emergency sale you’re still debt-free.