Is financing with low equity sensible?

I have now made appointments with the banks to get some numbers. It is clear that we at least have to finance the ancillary costs from equity, otherwise it will be expensive. The problem is that you usually only get better rates with at least 20% equity. For €400,000, that’s €80,000. Even with a lot of strict saving, that is an enormous amount of money. Of course, no one knows how income etc. will change, but the problem with waiting is that it also pushes back the repayment period. In addition, I “burn” €10,000 in rent annually. So it is currently easier to pay €1,500 installment and set aside €500 for special repayments than to save €1,500 in addition to the rent.

I have now made appointments with the banks to get some quotes. It is clear that we at least have to finance the additional costs from equity, otherwise it will be expensive. The problem is that better interest rates are usually only available from 20% equity. For €400,000, that is €80,000. Even with a lot of strict saving, that is an enormous amount of money. Of course, no one knows how income etc. will change, but the problem with waiting is that it also postpones the time until repayment. In addition, I "burn" €10,000 a year in rent. So it is currently easier to pay €1,500 in installments and set aside €500 for special repayments than to save €1,500 on top of the rent.

Misconception! You are not burning money on rent.. You are allowed to live there in the meantime. If you also want to save the rent, just move out

I put "burning" in quotation marks. Of course, I understand that I also receive a consideration for it. For new construction, I have somewhat different conditions. The prices of the land will probably increase somewhat, but in the region I have in mind, it is still manageable since the prices per square meter are still below €200, meaning they probably make up only about 25-30% of the total budget. The pure construction costs increase moderately, and if I build the house in 3 years, it will then also be 3 years younger. In the case of buying used, it is currently (and certainly also in the next 5 years) such that properties increase in price by about 4-5% per year. Since many sold houses are also somewhat older, the approximately 3 years lower age usually hardly makes a difference. The overall condition or the degree of renovation is more decisive there.

Now back to my calculation:
I plan to repay about €1500 and calculate about €500 in ancillary costs (which certainly must be calculated more precisely for the selected property). That means about €2000 monthly burden over approximately 25 years (if I calculate with a loan amount of €360,000, 2% interest, and 3% repayment, I come to 24 years). If I wait 4 years to build more equity (let's say that would be enough to generate 20% equity, then with the same conditions (290,000€, 2% interest, then 4.2% repayment) I could be finished in 19 years. Effectively, I will be finished 1 year earlier, and yes, I probably would have a better interest rate then because I have more equity. With the relatively high repayment rate, however, 0.3-0.5% no longer makes such a significant difference (approximately the same term with €50 lower monthly burden). Now let's take the one year earlier repayment end, or better 1.5 years to plan safely, then I am at €1500 x 18 = €27,000 difference amount. If I now calculate that I want to save €70,000 in 4 years, that is €1450 per month, which I must pay in addition to rent, which with my €1100 warm rent is €2550, thus €550 more than the €2000 (installment + ancillary costs) for the house. €550 x 12 x 4 = €26,400. So roughly the same. Once the bank gets it, once the landlord (who is generally more likeable to me than the bank, but ultimately I am selfish there). Either I am making a complete error in calculation, or currently it really makes little difference. Of course, I must consider that I might then get better conditions, on the other hand, the houses could also become more expensive again. In the worst case, prices increase by 10%, then I must save for another 2 years. If I calculate saving €1000 per month to reach a currently comparable monthly burden, then I would already have to save 6 years and the calculation becomes even less favorable.

The number of variables is roughly the same for both options, so there is risk in both cases. On the other hand, buying now has the advantage that I can already live in the house now (more space, no other people in the house, free design, etc.) AND that the €27,000 do not have to be paid now, but first in 23 years. Of course, this is only postponing, but on the one hand, it will probably be easier in the end simply to pay one year longer, that is now to cough up €500 more every month, especially since the likelihood is high that due to inflation alone, the salary in 20 years will be significantly higher than today.

Perhaps I am now too naive, but purely from the financial aspect, it currently does not occur to me why saving equity should bring advantages, apart from the fact that in the case of a "fire sale" in the first years one would probably lose a lot. Conversely, then a large part of the equity is gone, which makes no huge difference to me.

I just wanted to make it clear.. paying rent is not a bad thing and can definitely make sense. We already had this discussion "How much/how long to save equity" in great detail. You should check if you can find the corresponding thread.

From a purely economic perspective, it is indeed not always sensible.. I consider a certain amount of equity absolutely necessary for the following reason: From day 1, you have significantly more net wealth (house - remaining debt = net) which allows for a more relaxed sale in case of problems (work, health, etc.). The negotiating position with the bank should also be better in this case. Additionally, there is the experience from the saving phase regarding the handling of money and monthly restrictions. Another nice side effect: once you have moved in, the monthly income increases significantly again (at least for us) because the loan payment is significantly lower than the savings rate.

I will leave aside the fact that more equity also enables "more house." But for many, that obviously also plays a role.

Regards, Steffen

That’s also how I understood it. Primarily, it’s not about me desperately wanting to leave my apartment. There are some things that bother me there, but nothing critical. We would have space for one child, but we would then have to redesign a room, which also costs money, something I would personally prefer to do in a house, but that’s beside the point. It’s also the case that we will probably look around a lot during the initial excitement and ultimately buy later (maybe at the end of the year - mid next year). Nevertheless, at the moment I see rising real estate prices as a bigger risk than rising interest rates.

Where you are undoubtedly right is with the statement about net assets, at least for the next 5 years. After that, with more equity, the net value is even higher, but then you usually get out of the situation fairly well (of course with losses).

More equity = bigger house is not important to me right now. More important to me is the monthly burden. Here, I actually do not want to tie myself down any longer but would rather make special repayments if possible. My wife has a secure job (permanent position as a teacher, possibly even the chance to become a civil servant) and I would probably find something again relatively soon as well, even if perhaps with slight compromises. It would still be very likely enough to maintain the house and still not have an empty fridge. Even though I would claim to have quite high expectations, there is an absolute pain threshold. Currently, we have a property in mind that we could acquire with minor renovations for a total of €300,000 (+additional costs), which would be an amount we could probably pay off comfortably within 20 years.

Either I am making a complete calculation error, or it actually makes little difference at the moment.

Assuming the same conditions, the result is the same. If one considers the possibility that prices have increased by 10% in 4 years and the interest rate has risen by 2.5%, the situation looks different. Then one also has to consider whether it is more likely that the market has moved in 4 years or that absolutely nothing has happened in 4 years. The latter is hard for me to imagine.