Land financing / build in 1 year. Financing model?

Hello!

Briefly about our situation

We, a civil servant couple, 28 & 30 years old, + 1 child (staying the same)
1 permanent, 1 still in training

with a monthly net income of €4100 (including child benefit)
as well as €20,000 equity

after years of searching and numerous tendering processes have finally
been able to secure our dream plot.

It is supposed to cost €65,000 + incidental costs.

Our roughly estimated construction costs are about €220,000 for a 140m² residential bungalow.

We know that our equity is relatively low, but at least we can cover all
incidental purchase costs ourselves. Additionally, we are currently in the very fortunate position to live rent-free.

Because of this, we are currently saving about €1,500 equity each month.

The land purchase is imminent and the amount will be due at the end of the year. According to the sales conditions, there is an obligation to build within 3 years after the land purchase.

This suits us quite well since, due to professional and private reasons, we could not move there before summer 2019 anyway and will continue to live rent-free.

We have now been to 2 banks and a credit broker. We were not rejected by any, but
at one bank the possible total amount was unfortunately too low and we would not be able to cover the construction costs.

However, the land purchase is interesting now anyway, since no matter how and where it is concluded, it will first become two loans.

Both banks offered me a loan in the amount of the land price with an interest rate between 1.9% and 2.2% and monthly installments of around €300. The fixed interest rate period was 10 years.
I was advised not to use equity for the land purchase (except incidental purchase costs).

The banks said: Due to the small installment, you can save a lot until the construction project. For the construction project, however, we can only give you a rough estimate, because no one knows what interest rates will be in more than 1 year and you do not yet have detailed construction plans or cost breakdowns.

So far so good. Then we went to the credit broker. And he suggested something completely different:

Instead of already committing to a bank at the land purchase (keyword: 10-year fixed interest rate and corresponding entry in the land register), I should rather:

- Take a variable interest financing where the interest period ends every 3 months and I remain flexible until the construction (2% offer)

- Or if that is too inconvenient for me, there are also loans with only 1 year term (2.2%) and then after one year I can decide at which bank and under which conditions I take out the "main loan" which then of course also includes the remaining debt on the land.

To be honest, we are now a bit confused, since we have never done something like this before.

No one in our circle has ever had such comfortable time between land purchase and start of construction and therefore never had to deal with something like this. They all started directly with a loan agreement.

I also have not fully understood the land register entries:

If I now decide for such a 1-year loan, Bank X will still be entered in the land register. Now, for example, I start building after the aforementioned year but instead take the "main loan" at Bank Y. Bank Y then takes over everything. Won't there be costs again in the form of land register changes? Or is this not a classic "refinancing" because after 1 year the fixed interest period expires and I simply repay the amount for Bank X "in this way"?

We have now been to 2 banks and a loan broker. We were not rejected by any, however at one bank the possible total amount was unfortunately too low and we would unfortunately not manage with the construction costs.

They are right. It will never cost only 220K€.

-Do a variable interest financing where the fixed interest period ends every 3 months and I remain flexible until construction (2% offer)

Variable financing is the only sensible option here. Under no circumstances sign for 10 years or anything like that, then you are tied to this bank if you need the loan for the house within those 10 years or have to terminate the still running loan early, which involves costs. Variable loans should be somewhat cheaper imho. Maybe you should try another broker again.

Bank Y now takes over everything. Won't I again face costs in the form of land registry changes?

Either the old debt is repaid and deleted in the land register and then the new debt from the new bank is entered – that should be the usual procedure. Or the old, already registered land charge is taken over by the new bank and another one is entered for the delta. Both cost fees and are basically about the same. So it makes no difference.

Or is it not a classic "refinancing" because the fixed interest period ends after 1 year and I redeem the amount for Bank X "like this"?

Timing is half of life – if you manage that, you save the prepayment penalty at the first bank. It should be doable. Either the timing fits anyway or the new bank makes a short interim financing. It's a bit more expensive but only for a short time. Doesn't really matter.

In our area no one had so much comfortable time between the land purchase and the start of construction.

Are you sure that your land purchase is not tied to a construction deadline? That is not unusual, especially in new development areas.

They are right. It will never and ever cost only €220K.

The total costs including all outdoor facilities and kitchen will certainly be higher. We rather expect a total volume of €300,000. The €220,000 referred to an offer from a construction company but without any self-performed work factored in.

Loan brokers and the other bank have, given the current income situation, approved up to €330,000 with affordable installments. I worry less about the overall financing (guaranteed rising salary), even though no one can predict future interest rate developments.

Are you sure that no construction deadline is tied to your land purchase? Especially in new development areas that is not uncommon.

3-year construction deadline, but applied liberally. Basically “breaking ground is enough.” With mid-2019, we would even still be well within the deadline. The only issue is that neighbors don’t appreciate it if you delay the complete development of the street + the last one makes a lot of construction noise when everyone else already lives there. Unfortunately, I cannot change that.

I grew up myself in 2 new development areas. Some of what happened there... Some people still had no driveway or outdoor facilities 10 years after the street was finished. Some building gaps were only closed years after the deadline... I often get the impression these construction deadline clauses are more for deterrence, as long as there is some deadline so that no one gets silly ideas.

Variable financing is the only sensible option here. Under no circumstances sign for 10 years or something like that, then you are bound to that bank if you need the loan for the house within the 10 years or have to terminate the existing loan prematurely, which involves costs. Variable loans should be somewhat cheaper in my opinion. Maybe you should use another broker.

Would you prefer the 3-month or 1-year variant? The broker made the 3-month variant appealing because the interest rates were somewhat lower and he said that this would, of course, give me maximum flexibility regarding the start of construction. I just get sick at the thought of having to deal with something like that every 3 months...

Is it allowed to name specific banks or financial service providers here or discuss them? Can you recommend a loan broker to me?

This is how you proceeded: the property was variably financed in February and the home financing is coming now in December. The best thing is, you can make as many special repayments as you want (at the respective interest rate adjustment date). You don’t get this advantage with fixed interest rates.

Everything that wrote I can confirm.

Additional info: With a loan-to-value of about 60%, we got an effective interest rate of 1.51%. Since the interest rate level hasn’t changed, you could end up there. Our broker recommended the DKB, which we also took.

And don’t be fooled by the interest rate (The interest rate with fixed interest is of course lower). We borrowed 55k€ for 280€ total interest through the high special repayments in June and the upcoming December.

You have the savings rate, so use it.

Sorry, what is a Be(g?)leichungsauslauf?

We were also recommended the DKB with variable interest, but unfortunately currently at 2.05% effective.

Did you include equity in the property financing? Or only incidental purchase costs?

Can you tell me the broker (via PN, if he operates nationwide, I see you are from BY)

Would you prefer the 3-month or 1-year option?

The cheaper one.

I just feel sick at the thought of having to deal with something like that every 3 months...

That shouldn't actually be a big deal. The extension offer usually comes automatically to your home. You can also have variable loans that are, for example, linked to the Euribor. 1% + 3-month Euribor just as a fictional example.

Brokers - just inquire with the usual big ones. Interhyp, Dr. Klein, enderlein.
Sometimes local banks can also come up with something.