Home purchase financing - we cannot decide

Hello everyone,


I am now in the situation as well: We are planning to buy a single-family house. The house is already reserved, now we have to decide on a loan.


Briefly about us:

He is 28 years old, IT manager, €4170 gross + mid-range company car + bonus + annual salary adjustment (voluntary, but nothing should stand in the way). I am still studying computer science on the side. She is 27 years old, €2900 gross + 13th salary + bonus.

Both employed full-time with permanent contracts. Married, no children so far, earliest planned in two years. Second car available, but rarely used and in good condition. In general, we manage money very well. Monthly installment planned about €1400, that should be fine.


Plan:

Purchase of single-family house €365K + €44K incidental costs = total investment €409K.

€63K equity, €56K will be invested, the rest reserved. Needed loan (€409K - €56K =) €353K. New house, upscale fittings, ready to move in immediately, including kitchen. The bank has already inspected the house and certified it as very good.


Offer 1 (fixed), installment €1350

- KfW €50K, 10 years, monthly €203, residual debt €33K

- Annuity, €84K, fixed 15 years, 2.20% effective (2.18 nominal), residual debt €53K, monthly €300 installment, special repayment 5%,

- Building savings contract, €220K, fixed interest rate for entire term, 2.69% effective (2.18 nominal), no residual debt due to full repayment, monthly €400 + €450 installment, guaranteed allocation, unlimited special repayments (for the second phase, for the first phase I am not exactly sure)

-> Total costs (interest + fees) approx. €140K, residual debt €53K after 15 years, residual covered securely by building savings contract (total costs calculated correctly)


Offer 2 (through broker, offer will be concretely checked again by the bank), installment €1345

- KfW €50K, 10 years, monthly €203, residual debt €33K

- Annuity, €303K, fixed 20 years, 2.24% effective, residual debt €128K, monthly €1140, special repayment 5%

-> Total costs (interest) approx. €99K, residual debt €128K after 20 years (total costs were only interest)


KfW was not considered separately as it is the same in both cases.


To somehow compare the offers, I assume that no special repayments take place. If no special repayments are made, I have a higher interest rate change risk with offer 2 due to the high residual debt. With offer 1, I have higher total costs, but also greater security with a slightly longer term and lower residual debt. Special repayments are possible everywhere, with the building savings contract at the end even in unlimited amounts.


What do you think about our situation?

I look forward to your / any feedback.


Thanks in advance.


Best regards

Karsten

Regarding the assessment of the rate: The indication of a gross salary only helps to a limited extent here, as there may be tax-free components included and it is also easier to work with net income. Therefore: What do you earn net?

Regarding the offers: For offer 1, the building savings contract portion would be far too large for me. Yes, no interest rate risk for this component, but higher interest rates and overall costs. Offer 2 basically looks good.

Tip: Since you are still before the child phase, have a repayment rate change option included in your construction financing. This usually only applies to annuity loans. Then you can change the repayment rate between A and B (often 1% to 5% repayment, based on the initial rate) x times during the fixed interest period (have seen everything from 2 times to annually). This gives you flexibility for maternity leave, parental leave, possibly expensive daycare time. The interest surcharge for a repayment rate change option is usually very low (for example, I know from a large bank a 0.05% surcharge).

Normally, I would be in favor of the building savings option; because it usually offers significantly higher interest rate security.

But with option 1, you still have nearly 88k in risks overall. With option 2, 166k€.

Only 80k more interest rate security for 40k! more cost to secure?

This shows that the first offer is already quite steep.

So rather bank 2; also ask about the repayment change option as pointed out.

I would at least try to save in a building savings contract parallel to the KfW component. Either monthly or whatever you plan for special repayments.

After 10 years, you can decide which way to go. That means whether the building savings contract is called, the KfW is "normally" refinanced, or everything is done completely new, because interest rates are still very low (for loans longer than 10 years, you have a special termination right after 10 years).

Only after the KfW is secured would I even consider special repayments in the 20s.

Thank you for your answers. Regarding the questions: He, tax class 4, 2500 net, 2230 after deduction.. company car (all included, fuel etc. our main vehicle). She, tax class 4, 1870.

If I were to reduce the building savings contract and increase the loan, the risk would increase (even higher interest rate risk) but the total costs would only decrease minimally (building savings contract closing fee fixed at 3500). Actually, it's a question of what you prefer, security or risk. Hence my original question, can the offers even be compared with each other?

I will have the option to change the repayment rate included in the final offer and then decide. Although I think it will be fine as it is.

How are the interest rates? Are they okay for our situation?

Offer 1: 33K + 53K = 86K interest rate risk, costs = 140K
Offer 2: 33K + 128K = 161K interest rate risk, costs = 99K
-> Interest rate risk difference: 161K - 86K = 75K.
-> Cost difference: 140K - 99K = 41K

Means 75K more interest rate security for 41K euros? Did I calculate correctly? Indeed sounds a bit matter-of-fact. However:
- With Offer 1 I have to figure out how to pay off 53K after 15 years (without special repayments etc.).
- With Offer 2 I have to figure out how to pay off 128K after 20 years.
-> That is a very big difference.

The broker told us that we don’t have to worry about the interest rate risk of the KfW. The rate most likely won’t be higher than today. Therefore, we should repay the loan first.

The broker had communicated to us that we don’t need to worry about the refinancing with the KfW. The rate then most likely won’t be higher than today

He must have a crystal ball. The follow-up offer will be at current refinancing conditions. So if the interest rate is, for example, 3.5%, the same rate is only possible if the term is extended.

With offer 1, after 15 years I have to figure out how to get rid of 53k (without special repayments etc).

No, with the offer you only have to get rid of 33k after 10 years, and then 53k after another 5 years.

If you think about it now, you have with the offer the first 10 years 33k, then 5 years for 53k.

Now offer time 10 years for 33k, and then 10 years for 128k.

Viewed soberly, almost the same stress (k€/year), but you haven’t lost 40,000 in costs yet.

Moving away from interest rates, towards something I consider more important:

You therefore have a net income of just under €4,400 or €4,100 (with company car already deducted).

Honestly, I find the desired installment quite ambitious. With an installment of €1,350, that would be 31% or 33% (€ company car net) of your net income. From my perspective as a banker, that is too much. We advise our clients – exceptional high net income aside – not to spend more than 30% of their net income on cold construction rates, and that is already the maximum value. Furthermore, as you write, family planning is still ahead for you. Even if the person who initially takes care of the child switches to tax class 5 and the other to class 3, the installment would definitely be far too high.

I do not want to question at all that you currently believe you can afford the installment – otherwise you wouldn’t have been able to save up equity – but please do not underestimate future child expenses. Additionally, with a house the ancillary costs are not negligible either. Feel free to calculate here with €3 per square meter to be on the safe side.