Financing question - Do we have to buy the house first?

Hello,

We want to build a house. Including the land, about 500,000 euros including all additional costs. We currently live in a terraced house that we own and still have about 25,000 euros of debt on it. Value about 280-300 thousand euros. We still have about 50,000 euros in equity. Our income is about 3,000 plus 560 euros child benefit. How does the financing work? Do we have to sell the house first? We would take out the loan at the same bank where the mortgage for our terraced house is running. What options are there?

No typo, the 25,000 EUR?

Just plan your financing as you would without a house and pay any applicable VFE on the remaining amount. For that amount, any experiments (well-planned interlocking of old and new financing) make no sense.

In addition, of course, slowly plan the sale and see if the stated value is market-appropriate and, minus a suitable risk buffer as equity, possibly plan with interim financing.

Hello, no typo. There is still about 25 thousand remaining debt. But without the sales proceeds from the old property, we wouldn't get a high loan at all, would we?

Hello, no typo. There is still about 25 thousand of outstanding debt. But without the proceeds from the sale of the old property, we wouldn't get a large loan at all?

You could also mortgage and rent out the old property. Even then, you would get a large loan. It's a calculation example whether something like that is worthwhile.

But without the sales proceeds from the old property, we wouldn’t get such a large loan, would we?

Serious question: Why not?

The total costs amount to 500,000 euros, you plan a sales proceeds from the house sale of 250,000 euros (a small risk buffer already deducted, value was assessed by an appraisal or the bank). Minus the remaining loan (I’ll ignore the VFE for now), there are still 225,000 euros left. You use 50% of your equity so that you still keep 25,000 euros as a cash reserve.

So:
500,000 construction costs
-225,000 old house
-25,000 equity
=
250,000 new loan planned long-term according to your wishes.

In addition, there is a short-term loan of 225,000 euros variable (or fixed for a 1 or 3 month term), which will be extended until the old house is sold. You don’t need to repay this, as it will be taken over by the sale of the property. I would prefer fixed, it should be cheaper than variable; you should schedule the loan maturity so that it coincides with the end of the fixed interest period. This should be possible given the short timeframes.

The collateral for both loans is the new house, long-term as first priority, short-term as subordinate. You should insist that only the long-term financing is considered for the determination of the loan-to-value, and the bridging loan remains excluded.

And if the old house is sold for more than 225,000 euros, your cash reserve grows a bit more or the house gets better equipped or whatever…

That would be one possibility among many. I don’t see any problem as long as you can afford the monthly burden in the long run. For example, one year of double costs can be covered in an emergency with reserves. The cash is there, just unfortunately somewhat illiquid in the house.

Thank you for the answers.
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