Construction financing: sensible or nonsense?

Hi dear community,

my girlfriend and I are currently planning our house. The plot is already reserved. At the moment, we are in the cost planning phase. We have already received the first cost estimate from our engineer. Please don’t be surprised - because of the craft-oriented family background, we are doing a lot ourselves on the house. This includes, for example, electrical work, masonry, drywall, and the usual things.

but first about us:
He: 30, permanently employed for 9 years, €2,000 net.
She: 25, permanently employed in public transport for 2 years, €1,700 net.
no children yet, but planned in 2-4 years (max. 2).
Currently, we have no loans. We are more the savers.

To save on rent, we have been living in an apartment owned by her parents for 1 1/2 years and only pay a little (€250). Additionally, we save €1,200 monthly in a separate account to A: get used to the financial burden and B: save equity. This is working very well.

Plot 569 sqm fully developed including wastewater shaft and incidental purchase costs: €75k
House including ancillary building costs approx. 140 sqm, without basement, 1.5 stories, gabled roof, some frills, and double garage: €265k (own work of course already deducted)
- Equity €30,000. Additionally, we continue to save during the construction phase. That’s about €15k extra which we won’t declare to the bank. These will serve more as a small buffer.
Financing requirement approx. €310,000

Due to interest rate developments, we expect a longer fixed interest period. At least 20 years. The monthly burden should still be manageable - i.e., about €1,000 cold. I have calculated the additional costs as best as I can and come to about €400 monthly including all insurances, fees, and energy. Additionally, we want to set aside €200 monthly for maintenance. Better safe than sorry. These are also for when something breaks in the household (fridge, washing machine, etc.): Total that would be about €1,600.

So far, we have been with the red bank and an "independent" advisor.

The latest "offer" I received was for the mentioned financing sum with 2.07% effective interest and 2% repayment over 33 years at just over €1,000. Special repayments 5%/year, 20 years fixed interest, normal annuity loan. KFW not included, as it only has a 10-year fixed interest at the same rate. Therefore, it wouldn’t be worthwhile anymore.

The red bank wanted to push a building savings contract on us, but I am currently not very enthusiastic about it. I can’t explain why.... I consider the annuity loan the better choice - even though you have to manage the same burden for over 30 years.
Moreover, after 33 years, there will still be a residual debt of about €150k on the balance sheet. I will be 63 then and my girlfriend 58. Of course, there is still time until retirement, but won’t that be too tight?

I’m writing to you because I need an objective, clear assessment.

Thanks in advance.

Best regards

I cannot say anything about the financing, but a few words about the calculation. 140m² with a double garage for 265k is already ambitious, but where are the ancillary construction costs and the costs for the outdoor facilities?

First, take out a loan only for the missing amount for the land purchase and secure the land. We were surprised at all the additional costs that come with the incidental purchase costs. The municipality, land registry office, etc. suddenly all want money that we, for example, had not anticipated before. Registration of the priority notice of conveyance, deletion of the priority notice of conveyance, waiver of the right of first refusal, allocation of house number; property owner's liability insurance; and so on, and so forth. It adds up quickly, but no one tells you that beforehand.

Then have the site and elevation plan as well as the soil survey prepared and on this basis, you can then plan the house construction concretely and calculate how much credit is needed for the house construction. Help from an architect; building planner; future construction manager or however you want to organize it. Already at this point, you realize: with the previous savings rate, it’s quickly over once you start... suddenly everything flows into the house.

Help from friends and family is good, but still make concrete agreements: WHEN! Not "I’ll just do that for you" ... but specifically, e.g.: Electrician August 2019: scope of service: material costs

Only with that can you plan securely.

I can’t say anything about the financing, but a few words about the calculation.

140m² with double garage for 265k is quite ambitious, but where are the additional construction costs and the costs for the outdoor facilities?

Additional construction costs are included. 35k.
Outdoor facilities are calculated as 5k for paving and lawn. Excavator is available.

....

Then you have the site and elevation plans as well as the soil report prepared and on this basis you plan the house construction concretely and can calculate how much loan is needed for the house construction. Help from an architect; planner; future site manager or however you want to arrange it. Already here you can see: with the current savings rate it’s quickly over as soon as you start... suddenly everything flows into the house.

Help from friends and family is good, but still make concrete agreements: WHEN! Not..."I’ll just do that for you"... but concretely e.g.: Electrician August 2019: Scope of work: Material costs

Only then can you plan safely.

I basically agree with you. That’s why we are planning completely WITHOUT friends. Sure someone might help for 1 or 2 days, but that doesn’t make much difference.
As I already wrote, we are doing the masonry ourselves, drywall, electrical installation etc. That’s all already clarified and fixed. Timewise not yet, but that will follow early next year.
Construction start is anyway not until February/March 2019.

The soil report is currently in progress and our engineer already has the site and elevation plans.
The cost estimate is, as said, already there. It will of course be adjusted if the soil report shows something that doesn’t fit at all. But I don’t assume that, since it is a new development area developed by the Niedersachsen Landgesellschaft. They themselves sent a lot of people over the field before development.
The development area was agricultural field for over 100 years and offers very good building ground.

Thanks for your answers

The most recent "offer" I was presented with was, for the mentioned financing amount, 2.07% effective interest and 2% repayment over 33 years at a little over €1,000. Special repayment 5%/year, 20 years fixed interest rate, standard annuity loan.

The interest rate for 20 years is reasonable. Nevertheless, I would inquire with other providers! Once because of a variable repayment rate and maybe there is an even lower better interest rate.

Especially since after 33 years there will be a remaining debt of about 150k on the books. I will be 63 at that time and my girlfriend 58. Sure, you still have time until retirement, but won't that be too tight?

After 30 years, I would aim to have the loan paid off. Having such a high remaining debt in your early 60s is, in my opinion, not well planned.
At your age - finished before retirement! The sooner the better.

...
The [rote Bank] wanted to make a building savings contract appealing to us, but I currently don't think much of it. I can't explain why.... I consider the annuity loan to be the better choice – even if you have to bear the same burden over 30 years.
Especially since after 33 years a remaining debt of about 150k will be on the table. At that time, I will be 63 and my girlfriend 58. Sure, there is still time until retirement, but won’t that be cutting it too close?

I’m writing to you because I need an objective, clear assessment.

Thanks in advance.

Best regards

Oops, I made a mistake... SORRY

The total loan term is of course 33 years.
150k will be on the table at the end of the fixed interest period. Accordingly, after 20 years.
At that time, I will be "only" 50 and my girlfriend 45.

Crazy...

I can’t edit it anymore, so I’m writing it here below...