Evaluation of Financing Offer

Hello everyone,

for the construction of a single-family house, we have now requested a loan of 520k EUR from the bank.
Land + ancillary costs have already been paid in cash (200k + 12k).
Another 130k EUR is available as a CASH buffer.
Total construction costs therefore 850k EUR.

The bank is now offering us 1.98% for 10 years and 2.36% for 15 years.
Both terms come with 5% special repayment and 12 months free of commitment fees (if more commitment is needed, then 0.25% per month).

What term would you recommend?

Best regards
Smea

What loan term would you recommend?

What are YOUR expectations for the future? How will interest rates be in 10 years? How much security do you need? What remaining debt will there be after 10 years? What does your liquidity planning look like for the next few years? Many questions that you first have to answer yourself and to us ;) With 5% repayment, I would only take 10 years. With €15k net monthly income, also 10 years. With 2% repayment and weak creditworthiness, 15 years; with strong creditworthiness, only 10 years. Etc.

Some information is missing here, for example your income situation or the conditions of the loan. What is the initial repayment rate?

I recommend a simple calculation. Calculate the remaining debt for both 10 and 15 years with no special repayments. Can you still manage the remaining debt with hypothetical interest rates of 6% or 7%? The rest is, as so often, a matter of risk/reward ratio. You save 0.38% interest rate, which is initially just under 2,000 euros per year. Theoretically, you could put that into repayment over the 10 years. What does that bring you and how much do you save? Again, a risk/reward consideration. If you already have enough cash in reserve and can easily inject 250,000 euros of equity in 10 years, then your willingness to take more risk can make sense. Just make a few Excel tables and compare. The 2.36% interest rate seems like a good offer to me at the moment.

I would choose the 15 years at any time. Currently, it is not foreseeable where the interest rates are headed, and in my eyes, the interest rate difference is not that significant. It also looks like you have a fairly high income, so the 0.4 percent surcharge won't break your neck, but what if the interest rates are already at 5 or 6 percent after 10 years? Maybe unlikely, most would say, but can you rule it out?

Security would be my top priority here!

What expectations do YOU have for the future? How will interest rates be in 10 years? How much security do you need? What residual debt will remain after 10 years? What does your liquidity planning look like for the next few years?

Many questions that you first have to answer for yourself and for us ;)

With 5% repayment, I would only take 10 years. Also with €15k net monthly. With 2% repayment and weak creditworthiness, 15 years; with strong creditworthiness, only 10 years. Etc.

Thanks for the follow-up questions. Actually, I didn’t want to go into that much detail right now, but just looked at it from an overall cost perspective focusing on the interest rate development estimation in 10 or 15 years and the spread between both offers ;-)

So we still have a buffer with a stock portfolio of 150k as a fallback + a fully paid-off apartment.
I just wanted to keep that running and leverage the "still reasonably" low interest rates through the loan for the house.

Only €2k monthly payments are planned, which corresponds to about 2.5% repayment.
Income is €7.5k net (2 adults + 1 child)

Thank you for the questions. Actually, I didn’t want to go into it that much, but initially only looked at it from the total cost perspective with a focus on assessing the interest rate development in 10 or 15 years and the spread between the two offers ;-)

So we still have a buffer with a stock portfolio with 150k in reserve + a paid-off apartment. I just wanted to keep that running and leverage the "still reasonably" low interest rates through the loan for the house.

Only 2k per month is planned for the installment, which corresponds to about 2.5% repayment. Income is 7.5k net (2 adults + 1 child)

15 years. With the portfolio you might only need 10 years but have absolute planning security. Awesome, congratulations!