House purchase with renovation and equity financing sequence?

Dear forum,

I have quietly been reading along here quite often and now hope for helpful input regarding our situation, which is at least complicated for me. It is as follows:

We want to buy a house that needs renovation and then renovate it. For this, we have both some cash equity and a partially paid-off condominium that we currently live in and plan to sell after the house is completed.

My question mainly concerns the order of financing. My financial advisor recommends bundling the entire package—that is, the house purchase and renovation—into one financing. This basically makes sense to me, but what worries me is the following:
The house is in Cologne, and according to the architects, a building permit here usually takes 6-12 months. That means it will certainly take 18 months before we move in. So if I finance the entire package now, I am almost sure to run into problems with commitment interest. Also, I am locking in interest rates now that are very high and, at least in my opinion, could still drop somewhat next year. (I know it’s speculation.)

What I don’t quite understand is what disadvantages would arise if, for example, I use my current cash equity for the house purchase now (that would be about 40% of the purchase price) and finance the rest with an annuity loan over, say, 10 years.
I would only apply for the renovation financing once the building permit is granted and then work without cash but with the still self-occupied condominium as equity, financing the renovation through a variable loan that I would repay after selling the condo along with the BAFA individual measures subsidy and a KFW 358plus loan.
This way we wouldn’t be under as much time pressure if the building permit actually took a year.

Do I have a major flaw in my thinking here?
Which option would you tend to choose?

Best regards from Cologne

Hello,

Basically, your thoughts are justified. Whether the interest rates will fall, however, is really speculative.

Of course, you can also proceed as you suggest. First the main construction financing with the use of your own capital and then later take advantage of the KFW funding. However, I would always advise not to put all the cash in. Especially with renovation and the uncertain sales proceeds, you could be worse off.

Thank you very much for the feedback!

However, I would always advise against putting all the cash in. Especially with renovations and the uncertain sales proceeds, you could be worse off

I don’t quite understand that. In which exact case would I be worse off?

My current calculation would be as follows:

Financing the house purchase as described above.

Holding back some cash for planning and the time until the building permit.

After the building permit, I take out money at a variable interest rate for the renovation including some buffer, alongside the KFW loan (120K). (approx. 300K)

After construction is finished and we move in, we sell the apartment and fully repay the variable interest loan. (This will quite certainly work through the proceeds from the sale)

What would have to go wrong against me now, besides me not being able to sell my apartment, so that I would be worse off? Or what would be the advantage if I hold back significantly more cash now?

After obtaining the building permit, I will take out money at a variable interest rate for the renovation, including some buffer, alongside the KFW loan (120,000). (approx. 300,000) After the construction is completed and we move in, we will sell the apartment and fully repay the variable interest loan. (This will almost certainly work through the proceeds from the sale) What would have to go wrong for me, other than not being able to get rid of my apartment, that would put me at a disadvantage? Or what would it achieve if I now hold back significantly on cash?

I would do it this way. You can also only receive KfW after Bafa approval. The variable loan could already be applied for now. There are no commitment fees, only an approval commission – which is (almost) negligible. At least with us (around 0.20% p.a.)

For many renovation measures, you do not need a building permit. For example, heating, windows, bathroom you can start immediately. It is unlikely that any bank will be happy to finance only for 6-12 months and just pass on the longer KFW loans.

There will probably be no bank happy to finance only for 6-12 months and just pass on the longer KFW loans.

Yes!
I charge well for the interim financing and the KfW loan actually has a SIGNIFICANTLY higher margin for the bank than its own loan would have. We are very happy to do this ourselves for our clients (large projects).