How does our construction financing work best?

Hello,

our construction project is planned so far. We have various offers from construction companies and the plot of land has also been selected and reserved. Therefore, we can now estimate our costs quite accurately (also thanks to a forum member). We are currently obtaining various offers from banks, but we are not really familiar with this topic. Therefore, I wanted to ask here what would be the best way for us. It would look like this for us:

Two-family house = my sister and I would share the burden together
Net income my sister: €1600
My net income: €1900
We want to pay off about €800 per month including utilities, so together €1600/month
The plot costs €95,000 and can be financed with equity
House including ALL ancillary costs costs €265,000 = this would have to come from the bank (= so per party €132,500)
We want to pay off in 25 years if possible

What do you think? Realistic? And how should this be done best? I would be happy if someone could help us.

One more note: Of course, you should not count on this, but since we are both still very young (27 and 25 years old), we assume that our income will increase over the years. Therefore, we hope to be able to pay off more in about 10 years.

Regards

Kati

At the current interest rate of approx. 4.5% over 25 years, an interest and repayment amount of approx. 750 euros/month per person, so 1500 euros for both of you, is necessary. With 800 euros you will not get there.
Regards Pit

Well, even if you really needed €1500, that wouldn't be the actual problem, since I assume you mean by additional costs the usual additional costs like heating/water/garbage collection etc. that should probably not be more than €200 per person, meaning each of you would have to pay €150 more than planned. However, only if you really build with 4.5% interest, I was at the bank just this week regarding our financing and I'm at an interest rate fixed for 10 years at 3.09% but with over 40% equity (land counts towards that). Rising salaries are not included here but I wouldn’t count on that, everything else will also get more expensive :) But how much you expect your salary/your salaries to increase you have to estimate yourself. And you should definitely still have a reserve whether it is in the form of equity or that you can, if necessary, come up with an additional €100 monthly for something.

Yes, 3% can already be achieved but only with an interest rate commitment of over 10 years, after which you have the risk of rising interest rates upon renewal. In my option, the interest rate would be fixed for 30 years, with a special termination right after 10 years if needed. Meanwhile, interest rates have fallen somewhat, so 4.3% may possibly be achievable. Alternatively, you can also save for 1-2 more years, for example in a [Bausparvertrag], and then work with more equity, which of course also reduces the burden. Regards, Pit

Hello, thank you for the feedback. I have now inquired at various banks and think that 3% for 10 years might be best. But I am not sure yet. Of course, there is a risk, and of course you cannot know what the situation will look like in 10 years. But we will probably take the risk.

Another thing: I am building together with my sister now, and the equity belongs to both of us (it comes from our father). We have applied at the banks jointly – so as one sum (like a married couple). Could that cause problems? I do not assume that my sister will stop paying at some point, but what if, for example, after 10 years I want to pay off more, but my sister does not want to or cannot? Is it possible to split it after 10 years?

Best regards
Kati

You can separate that from the beginning, although at the bank you will certainly be jointly liable. This means that one is liable for the other. In other words, if one stops paying, the other will be held responsible and in the worst-case scenario, which hopefully does not happen, [zwangsversteigert]. So you are liable for each other in any case, because half a house is hardly saleable, unless you register the apartment separately from the start in the case of a two-family house, so that it stands separately as two units in the land register. Then one apartment can be sold and the other not.
Regards Pit