Decision: Co-finance parents' house or build equity?

Hello everyone,

I am facing a difficult decision. My father (67) currently lives in his house (single-family home), which I would estimate to be worth around 200,000 euros. The loan still amounts to approximately 130,000 euros and expires at the beginning of 2017. He himself will only be able to pay the essentials from his pension in the future, meaning the interest according to the follow-up offer (probably ~2%) and 1% repayment – in total maybe 300-500 euros. An offer from the current bank as well as from other banks still needs to be obtained.

About me
I am 33 years old and want to move out of my rented apartment and buy a house within the next 2-6 years.
Income (monthly/net): 3,000
Equity: 35,000
Saving rate: 1,600

Option 1
I continue to save – as before – equity and buy a house in the above-mentioned period.

Option 2
I participate in the follow-up financing to a certain amount (900€?) and save the rest (700€?). If I then find a house, the repayment for my father’s house will be reduced so that only he continues to pay. In case of emergency (see next paragraph), I could step in again. However, this requires a two-time adjustment of the repayment during the term of the contract.

Why option 2 at all? Unfortunately, I have to consider that my father will not live to be 100 years old, especially since he has already had a serious illness that could break out again at any time. This way, the currently low interest rates could be used without later buying an overpriced property.

Notes
A) My girlfriend has an income of ~2,000 and no equity. She would of course co-finance when buying a house, but I exclude her from the considerations regarding option 2. Marriage and ~2 children are also planned or considered within the mentioned period (2-6 years).

B) I have another brother who lives too far away to use my father’s house himself (not an option for him either). At the end of the day, I would have to offset or pay him out for my invested share if the house is sold or if I use the house myself.

Questions
1) I assume it makes no sense to transfer the house/loan to my name because I would not get another financing otherwise. Or does the house count as equity of about 70,000 euros?

2) Is the value of the house estimated again during follow-up financing?

I hope I have expressed myself clearly :) I would be happy about opinions and tips. Best regards and a huge thank you in advance!
Daniel

Since you mentioned the topic of serious illness, and also that your father does not have enough own funds to fully cover possible care costs; one more important tip: You should google "parental maintenance and social assistance recourse in the event of care".

Regarding question 2: Normally yes.

You urgently need to deal with the topic of follow-up financing. Especially because you still don't have this settled; let alone have collected concrete offers.

The new credit check might significantly ruin your current situation.

Just make the annual special repayment on your father's loan, the amount can be easily deducted in the event of inheritance and no one factors in your 700 euros monthly when financing.

Hello Daniel,

I would definitely have this checked from a tax and inheritance law perspective. De facto, as of today, you would inherit the house with about 130K€ of debt, so 65K€ each. In case of a sale, 200K€ would be achieved, leaving 35K€ for each.

However, if you pay off the house (proportionally), a larger share of the house belongs to you each month than to your brother. This must somehow be contractually ensured – whether that is basically clever is another matter. For me personally, that only makes things unnecessarily complicated, so I would therefore consider the situation with your father's house and your brother independently and discuss together the equally divided options. Possibly you can also arrange something with [anticipated inheritance]; then you would be owners together and your father would retain a right of residence or pay rent, there are different possibilities that can be discussed with a tax advisor. The aforementioned situation regarding care etc. would also be discussed as part of this.

In addition, I would consider what should happen to the house in the event of inheritance. Taking over the loan makes sense in my view only if you want to live in it yourself. Your brother does not want that, and it does not sound like you do either – so why additionally service the loan? If it is rented out in the event of inheritance, the loan is paid from the rent. If the rental income is not sufficient or you do not want to rent, you sell the house. What remains for each are the above-mentioned 35K€ + x, with which each can then do whatever he wants.

Best regards
Dirk Grafe

Why don't you (your brother and you) finance the missing money of your father together? My husband and his brother would have done that 2 years ago, when it was discussed that the parents wouldn't manage it alone. But then it turned out differently.

The refinancing into your father's house hardly makes sense unless you also want to move in there. Because of your brother as a potential co-heir and the difficulty of dividing real estate (everything has to go through a notary...), you should really think this through carefully. If you do something like this, for example it would make sense to basically pay out your brother today (e.g. with your own capital) and have yourself registered as the sole owner of the new house, including lifelong right of residence for your father. But these are all just ideas that you three (you, brother, father) can sort out together. If you simply pay for the financing now without notarial paperwork and costs, half of your payment will be lost in the event of inheritance (fifty-fifty...). A simple piece of paper can quickly be insufficient. As said, the financing only makes sense if you also want to live in the house. Otherwise, you are pumping money into a big black hole, where in the best case you only get your money back in the event of inheritance. All purely financial considerations without the family component.