Land purchase with varied financing - is it sensible to hold back equity?

Hello everyone,

a few months ago we had a consultation with one of the large financing brokers to determine our maximum loan amount for building a house.

In the conversation, I explained that we intend to first buy a plot of land, finance it variably in the meantime, and then fix the house construction and the total loan.

For the plot of land (if we ever find one :-) our desired upper limit is 350 TEUR (excluding incidental costs, for 500 to 600 sqm).

We currently have 230 TEUR equity.
Minus 30 TEUR emergency reserve
Minus 50 TEUR equity reserve for the house construction

I was of the opinion that we would therefore invest 150 TEUR in the plot purchase and finance the rest (i.e., about 240 TEUR including incidental costs) variably. The equity already invested in the plot is then later counted as cash equity in the house financing, so I thought.

The financing broker, however, advised not to invest the entire 150 TEUR equity in the plot purchase but to keep some of it back as cash equity to use it as leverage for interest rate optimization of the total loan.

I have not read about this strategy here or generally when googling.
Is there any truth to this suggestion?

I am skeptical about what to make of it. I always read, all equity into the plot, which then counts as equity for the total loan.
Or is that only true if you can finance the plot completely from equity, that is, without additional variable interim financing?

Thanks in advance for your input

Jo

Using leeway for interest optimization of the total loan.

Never heard of that. Basically, you are right. Everything runs through equity. I would only keep a bit of a buffer and hold back for furniture like, for example, kitchen and lamps. Of course, it also depends on how much salary comes in monthly.

I have not read this strategy here or generally when googling. Is there something to this suggestion?

Maybe he means that more equity does not improve the interest rate any further and you could treat yourselves to something nice with the saved equity.

Whether you pay for the property with equity or hold it back doesn’t improve anything... Rather, holding back equity tempts you to "misappropriate" it...

But of course, it can make sense to hold back equity if you plan a lot of personal contribution to pay invoices and don’t want to bother with constantly drawing funds. Otherwise, I can’t think of any valid reason.

Thank you for your answers!

Basically, you are right. Everything runs through equity

Good to read that I was not on the wrong track after all.

Maybe he means that more equity doesn't further improve the interest rate and you could treat yourselves to something nice with the saved equity.

Unfortunately, that was not the case :). It was actually about the fact that the cash equity can possibly be the deciding factor to get better conditions.

But of course it can make sense to hold back equity if you plan a lot of personal work to pay invoices

That would be understandable, but no personal work is planned and I also didn’t say otherwise in the consultation.

Best regards
Jo

It was actually about the fact that the cash equity could possibly be the deciding factor to get better terms.

But then you have to contribute the equity - holding back a bit worsens the condition. What’s sitting in your account doesn’t interest the bank for the loan condition ;)