How to best plan financing?

Hello,
the following project is coming up soon. My wife and I want to build a house. Costs including land and incidental construction costs are about 270,000.
Available equity is about 90,000. Less 10,000 that we want to keep as an emergency fund, so 80,000.
Yes, now the question is how best to proceed. Monthly net income is currently about 4,300. However, we plan to have children in the next 1-2 years, so income may decrease by about 1,000 euros during that time.
It is perhaps also important to mention that about 2 years ago I bought a condominium to rent out. Value 70,000, financed 50,000. Repayment is covered by rental income.
Since I currently still live relatively far from the planned location, but that will change in the next six months, I wanted to first focus on buying the land. Where we want to build, I expect about 50,000 euros for the land. The plan is to pay that from our equity.
Possibly in March next year I would like to start building. I think that by then about 10,000 euros more of equity will be available.
Does it make sense to buy the land from cash assets, or rather finance it? How should we plan the financing? Is it perhaps even advantageous to start building earlier? What funding opportunities are still available? How do you assess the interest rate development?
Questions upon questions... Maybe there are some tips for us hereJ
Thank you very much and best regards
Danny

Hello Danny,

I would not finance land unless you can make your equity work at higher interest rates than your loan interest rates. Also, you will have higher notary costs. Then you will be charged his rates twice. You wouldn’t believe how much a letter at the notary costs. If you don’t finance your little house at the same bank where you possibly financed your land, the "egg dance" with the ranking order in the land registry starts.
Funding opportunities? If you want to build in NRW, there are no state funds for you! We currently have an income of 3300.00, we have one child and my wife does not work. We get nothing from the state. A deduction for the child is calculated but it was not enough for us. Maybe you can snag some funding if next year there are triplets or something. It’s enough if the partner is pregnant.
However, there is funding from the Kreditanstalt für Wiederaufbau. If your building project reaches a certain energy standard KFW70, KFW55, etc., there are subsidized loans from KfW. 50,000.00 per housing unit. Furthermore, you can also finance an additional 30% of construction costs through KfW. The interest rates there are very good, sometimes also subsidized by direct banks. That results in almost "unbeatable" interest rates. But you should inform yourself about the KfW beforehand and specifically ask about it at the "bank consultation" (next joke). Banks often forget to offer it in order to sell their own more expensive loans.
The current eligible KFW70 standard is supposed to become the normal standard in 2012, which every builder must meet as a minimum. I rather doubt it will be subsidized as generously as it is today. You should consider starting your building project possibly in 2011.
The interest rates will probably rise further. On what level, even the banks themselves do not know. The question is how independent our ECB really is and whether it is serious about fighting inflation. (Good joke) A counter question: who can still build at an interest rate of 10%? Entire industries would collapse. How are countries like Portugal or Ireland supposed to finance themselves then? Or even Germany? At the moment we are experiencing quite a bit of scaremongering. Since I no longer consider the ECB independent anyway, all countries are heavily indebted anyway, and probably would even be happy about a bit more inflation, interest rates will probably rise a little more, the ECB is controlling inflation a bit. But it probably won’t get much higher than that. But that is just my opinion. Let everyone form their own opinion.
Regarding financing and "bank consultation" I have already expressed myself here in the forum a few times. Your equity seems to be growing faster than the interest rate level. As long as you don’t let yourself talk into the first trial interest rate the bank offers, you will still get a pretty decent financing in about a year. The more often the bank uses the word "security," the more expensive it will be for you, even if it doesn’t look like that at first glance. Security costs money, after all. With the term building savings contract (I don’t think much of it), pay close attention to the repayment phase. If the word bridging finance comes up, all alarm bells should go off. Super expensive! Google the word "Riester annuity loan." Great thing, as long as the house is meant as a retirement provision. Hardly offered, benefits you more than the bank. The bank can hardly hide commissions in it.
Generally applies: inform yourself, tell the bank what you want, propose an interest rate, and if they want to sell you any rubbish, break off the consultation and go to the next bank.

Have fun building
Ille1975

Hello Ille1975,

thank you very much for your very detailed answer and the tips you listed. It already helps me a lot. Yes, I would not have thought the topic would be so extensive. Everyone recommends something different, of course. I’m just thinking about our parents-in-law. If it were up to them, we would have to save a little longer. Well, I’m 36 now. If I think that ideally the house will be ready in a year and in the worst case I might pay it off over 30 years, I will be 67 then. If I save for another 1 or 2 years, I could maybe add 10 - 20 thousand euros in equity. But of course only if you really restrict yourself a lot. In this calculation I have to consider the rent paid during that time. At about 650 euros cold rent, that’s at least 15,600 euros. That would mean I effectively have 5,000 euros more and that with great restrictions. If I assume that interest rates and construction costs might rise, that wouldn’t bring me anything at all. Then it’s better to build sooner, still save, and exhaust the special repayments. Do I have some kind of thinking error here, or does it really look like I should build now? Oh yes, by the way, the construction project is supposed to take place in [Sachsen].

Hm, the whole topic is not so easy at all.

Many greetings

Danny

Hello Danny,

your equity ratio is very good. We originally wanted to buy used. After various junk offers, we switched to checking out a new build. After various competitive offers from "affordable" providers, we ultimately ended up with an architect. Two friends have also built with him, and they confirmed the price and quality. That more than made up for the rest. Our costs actually always ended up higher. At the same time, however, the future additional costs, we are building a Kfw70 house, have continually decreased, and thanks to the KFW subsidy also the monthly burden. Ultimately, we (actually had to) already go to our limit and add more and more equity to ensure the equity-debt ratio is right. For total costs of 220,000.00, we had to take out 170,000.00. Fortunately, we signed the loan contract two days before the KFW interest rate increase. Overall 120,000.00 with KFW at 3.6 or 3.8 and 4.25 for the rest. Those are the described subsidized KFW interest rates. Burden 761.00 EUR. Including additional costs, that's maybe 200.00 more than my current rent including heating. Even my wife as a kindergarten teacher can bear that alone. With your equity ratio, 5000.00 doesn't really matter, especially since you still have 10,000.00 in reserve. Our reserve is much more modest. Ultimately, you have to work that out with yourself. And I don't pay off the little house over 30 years. There are special repayment rights and repayment changes. But everyone has to decide that for themselves. Fancy car, fat vacation, or all a bit more modest and maybe put 2000 or 3000 into special repayments. Matter of opinion!

Regards Ille1975

If you build in Saxony, there might be something like a relocation bonus or something similar in terms of funding. The new federal states are indeed struggling with population decline. The advice everyone gives is certainly all good arguments. The older generation is probably not wrong when they say, "Boy, better save a little more, then you have to repay less credit." Banks will certainly advise you to build immediately. They want to 1. sell and 2. they are probably not wrong if they fear rising interest rates. Based on your data, I would advise you to build. You have enough equity to get a decent financing. Although the loan is very high, you also create a huge value in return. As long as you don’t build your little house in a flood or earthquake zone, you should basically always break even +/- zero with this deal. Your equity may be gone then, but you can very likely start again at zero and not with debt. Real estate prices actually cannot fall that low, unless you plan to let your little house deteriorate from the start. Maybe you also have one or two life insurances that would enable your partner to keep the house. Under certain circumstances, she might even manage to pay the installments alone if you, for whatever reason, drop out as the earner. It does let you sleep peacefully when you have plan B + C in reserve. By the way, these are quite good arguments when negotiating with the bank. Most people are not interested in that. But they don’t have to be. You only need one bank that listens to you and makes concessions regarding interest rate and default probability. Take a week off and visit the banks. It can also be fun to break off conversations and reject the super offers. By the way, with the KfW loans, you at least have one year without repayments, meaning a lower burden. I believe you can even afford up to 5 years. You can use them to pay off expensive loans at your house bank or to rebuild reserves. A 10,000.00 reserve is already a safe thing. But maybe 5,000 or 6,000 are enough. It’s your own risk assessment.

Hello ddanny, we are currently facing the same question whether to pay for the property "cash" or finance it. In our case, it looks like we will finance the property and have the rest of the used loan made available to us interest-free for 12 months. We hope that the whole thing will be settled within these months since the ECB will certainly increase the key interest rate. Of course, no one can predict how interest rates will develop further, but I expect rising interest rates for the coming years, which certainly won’t reach a level of 10%, but could well move towards six or seven (my opinion). I also cannot fully agree with ille1975 regarding the bank consultations. We had excellent advisory meetings where I did not feel like they were trying to push anything on me or that I was poorly advised. You just shouldn’t enter such meetings without some basic knowledge to take the wind out of the "seller’s" sails right away.