Is construction financing representable like this?

Hello,

our small family (meaning my wife, our son, and I) want to build our own new dream house and are already very concrete in our planning. We have a super great independent architect, we have found an amazing plot of land for us (which has not been purchased yet), and the architect’s designs fit us absolutely.

Our architect has of course also provided us with the documents for the bank, meaning cost calculation, designs, cubic volume calculation, etc.

So far everything was super great and we were extremely enthusiastic, but now we have the problem that we are getting somewhat "cold feet," since it is simply an insane amount of money and one realizes now that it is getting serious. And of course we wonder whether our financing is really feasible as we have estimated so far, since the loan-to-value ratio is quite high. If the bank includes the KFW loan, it would be about 86%! Without knowing the bank’s safety margin.

Here maybe our key data:
- Construction costs incl. incidental building costs and land - 337 TEUR
- Loan amount - approx. 287 TEUR
- Equity - approx. 55 TEUR
- Total monthly net household income from salaried employment - approx. 6,600 EUR
- Kfw Program 124 (home ownership) is to be used - 75 TEUR

We want to rely on a classic annuity loan, with a monthly rate of approx. 1,500 EUR, which corresponds to approx. 2.5 - 2.75% repayment.

We have no other loan obligations and a "clean" credit record, but are still unsure whether our financing is feasible this way.

Thank you in advance for detailed feedback

When I read the post, I first wanted to write that with €6,600 net monthly income that should be no problem at all, but you want to pay off a maximum of €1,500 per month, then you will be paying forever.

If you were to assume 4% interest, it would certainly be possible, but then the fixed interest period is only about 10-15 years and after that time you still have a remaining amount of almost €200,000. What if the interest rates then rise sharply by that time?

I haven’t done the full calculation, but with a bit of bad luck regarding the interest rates, you will be paying off for 40++ years if you haven’t invested money elsewhere or made higher special repayments.

*Edit - paragraph deleted (had misread something)*

You really have to throw money around if you’re getting rid of €5,100 per month in other ways.

Hello pat83,

first of all, thank you very much for your feedback. And you have exactly hit the right spot. :-) The remaining debt would still be extremely high after 10/15 years without special repayments.

We determined the monthly 1,500 EUR based on a very conservative income/expense calculation. And if everyone is honest with themselves, no one really likes to drastically change their lifestyle. And that's how we see it too. We still want to be able to afford a nice vacation, we currently have a day care provider who costs 450 EUR per month, we want to offer our son a bit, and in a few years the second child should be here. Taken all together, this has led us to set the monthly rate somewhat lower than would theoretically be possible.

But in the meantime, we have come up with a completely new model.

1 KFW loan with 75,000 EUR 1 loan with 50,000 EUR and a term of 3 years 1 loan with 50,000 EUR and a term of 15 years 1 loan with 112,000 EUR and a term of 10 years

The loan with the 3-year term we will fully repay after the 3 years, as we will receive a gift in that amount at the end of next year.

And we want to make special repayments of about 5,000 EUR per year (except for the KFW loan, where this is not possible). This way, we will have no problems with follow-up financing, even if interest rates should "climb" to 8%. BTW, we have calculated that the break-even interest rate to decide whether to fix the interest rate for 10 or 15 years would have to be around 6.5%. In my opinion, that is not helpful at all for making a decision, because 6.5% is very realistic. But unfortunately no one has the famous crystal ball...

well with the information it looks much better right away 50,000 euros disappear completely after a short time and about 5,000€ special repayment also correspond to 400€ monthly rate on top. Additionally, it is not the case with you that you cannot afford it if something should become a bit more expensive since there is a considerable buffer in your income in case of emergency.

I would also like to have those problems sometimes. I don't live badly either, but the ratio of net income to the installment somehow doesn't add up :) And why do you have so little equity with that income? Are the expenses really that high?

Hello pat83,

first of all, thank you very much for your feedback. And you hit exactly the right spot. :-) The remaining debt would still be extremely high after 10/15 years without special repayments.

We determined the monthly 1,500 EUR based on a very conservative income/expense calculation. And if everyone is honest with themselves, nobody really likes to drastically change their lifestyle. And that’s how we see it as well. We still want to afford a nice vacation, we currently have a daycare provider who costs 450 EUR per month, we want to offer our son a little something, and in a few years the second child should be here. Taken all together, this made us set the monthly rate a bit lower than what would theoretically be possible.

From my point of view, exactly the right decision, especially since a second child is practically planned and at least temporarily definitely an income (x% of 6600) will be lost. Mandatory rate low, set special repayment options to 10% and then also use them :D (the majority of these contracts will never be serviced with even one special repayment, although today every customer wants this option).

But in the meantime, we have discovered a completely new model.

1 KFW loan with 75,000 EUR
1 loan with 50,000 EUR and a term of 3 years
1 loan with 50,000 EUR and a term of 15 years
1 loan with 112,000 EUR and a term of 10 years

We will fully redeem the loan with the 3-year term after the 3 years because at the end of next year we will receive a gift in that amount. ...

And why do you want to pay interest for 3 years then?

And we want to make approximately 5,000 EUR in special repayments per year (except on the KFW loan, where this is not possible). That way, we won’t have any problems with follow-up financing, even if interest rates “climb” to 8%. BTW, we calculated that the break-even interest rate, to decide whether to fix interest for 10 or 15 years, would have to be around 6.5%. In my opinion, this is no help at all, because 6.5% are very realistic. But unfortunately, nobody has the famous crystal ball...

Kind regards
JoS
Advice - but fair!