Is the construction loan higher than the purchase costs due to possible repairs?

Hi,
we are planning to buy a house, the financing is more or less settled, but we are not sure about one question:

Does it make sense to borrow more money from the bank right away than is actually needed for the house purchase?
For example, €30,000 more, for repairs or modernizations that might eventually need to be done?
As long as the money is not needed, it can be invested. The interest rates there are even higher than what we would have to pay in interest.
We just think that if we had to borrow money again in 1, 2, or 3 years, we would have much worse conditions for the new small loan than if we simply set the construction loan higher.

What do you think?
Thanks!

Welcome to the forum.

First of all, it is completely normal to borrow more money from the bank than the pure house purchase costs. Almost all existing houses need to be renovated or even refurbished, which depending on the condition can easily be six-figure amounts.

However, you need to know in advance how much extra you need, and depending on the amount, they usually want a rough plan in advance of what you need the funds for. Whether that is already the case at €30,000 I do not know, it depends on the bank.

As long as the money is not needed, it can be invested.

That will rather not work. The bank wants the money to be invested in the house so that the house has a corresponding value against the loan. You can sometimes get a few thousand euros outright without questions, but €30,000 rather not. Instead of investing and getting interest, you will pay commitment interest to the bank until you have used the money for the refurbishment.

However, you can conclude a contract that allows you to call up amount x for the refurbishment, or "leave it with the bank without penalty." I am currently missing the right term for what that is called. I think something like that would be quite suitable based on your brief description.

Of course, everything also depends on the equity used and the lending value, but that goes too much into detail and as said, it is slightly different with every bank.

The most important thing is that you know in advance how much you need for renovation or refurbishment. Additional financing is always expensive.

depends on how the loan-to-value ratio is.

What purchase price and loan amount do you have in mind

Good evening Zuum736,
first of all, congratulations on the financing and the property. Before I address your question, I have the following preliminary questions:
1.) Were the renovation/modernization costs calculated by a building expert, architect, or a professional with many years of experience, and was the house also inspected in advance
or
2.) did you (or another person) estimate the modernization costs without experience in modernizing older properties.

If point 2 applies, the loan amount taken out for the modernization/renovation usually does not fit. Then at least a "buffer amount" of 20-30 percent of the modernization costs should be planned additionally (however, I always recommend inspecting the house together with an expert - old houses can become real "piggy banks").
This "buffer amount" should be drawn down upon loan disbursement by invoices (some banks pay up to €10,000 at the end without invoices - but please clarify this in advance!!). A payout of the loan without invoices is usually not possible - thus, the money cannot be invested either.
If the remaining loan amount cannot be drawn down (no invoices or ideas available), it can be returned to the bank by paying a prepayment penalty.
Provision interest accrues depending on the loan agreement after 2 to 24 months. These are quite expensive - the interest rate is between 0.15 and 0.25 percent per month (also regulated in the loan agreement).

There are also a few banks that have agreed in the loan terms for purchase including modernization that either a certain amount (up to €25,000) can be returned without prepayment penalty or that the prepayment penalty can be waived against an interest surcharge (this for your information).

Whether you get the further €30,000 depends on the submitted construction cost statement and/or the loan-to-value ratio at the bank. You would have to clarify this with your bank.

If you have any further questions, I am happy to assist you.

Best regards

Make a calculation. Not only comprehensible for the bank, but also for you, showing all items besides the selling price. For the preservation or increase in value of the property, this and that for modernization. And that will be your financing basis. As mentioned above: up to a certain amount, you can freely dispose of it, for larger sums you have to provide proof, such as invoices for materials. It will be fine – just ask the bank. They don’t bite.

... for larger amounts, proof, i.e. invoices for materials, must be submitted...

At that time, we also took out a bit more money from the bank than we actually needed just for the purchase of the house and covered the most important renovation and modernization measures with it. The amount was > 20K and less than 50K EUR, so it was not that high. Our bank wanted to see proof such as invoices, hardware store receipts, etc., for the part of the loan needed for the modernization/renovation of the building to ensure that the borrowed money was not misused for new furniture, for example (consumer loans generally have somewhat less favorable conditions than construction financing loans). This was communicated from the beginning and was not a problem for any of the contracting parties. As ypg already said, you can and should talk to the bank, and if a bank is not willing to negotiate or does not offer the desired terms, you go to another bank. Fortunately, there are several.