Larger loan with only 5 years interest fixation

Hello everyone,

we are currently planning our single-family house with our architect and will have to take care of obtaining a loan by the end of the year. The final costs are not yet determined, but it will probably be around 600,000-650,000, depending on the equipment we choose and whether we implement all wishes from the start or postpone some initially. The problem: we only have about 100,000 in equity, so the conditions for the loans are anything but attractive. Therefore, I have the following idea: of the 550,000 to be financed, about 40,000 will be financed through a mature building savings contract and 150,000 through KFW with relatively good conditions, as they are independent of equity. For the remaining amount, we would choose a simple annuity loan without any extras (prepayment, change of repayment rate, etc.) with only a 5-year fixed interest period so that the interest rate is as attractive as possible. The goal would be to repay about €125,000 in the first 5 years and only then take care of the final financing plan with significantly more attractive conditions, as the loan-to-value ratio would look significantly better in 5 years than now.

Motivation for this approach: I think the likelihood that interest rates will increase sharply in these five years is very low. Banks often assess the difference between 5 and 10 years fixed interest at about 0.1%, which basically means that from their point of view, the situation in five years will not be much different than in ten. The eurozone with many indebted countries in the south can no longer afford to raise interest rates without causing another crisis in these countries, so interest rates have only known one direction for many years. And even if, contrary to expectations, something should develop differently, it would not happen overnight but in small steps, most likely quarterly or semi-annually, so that in case of emergency, one could still protect themselves in time with a building savings contract or forward loan.

We have a relatively high income, so we can manage a rate of up to 3500 relatively easily. However, we do not want to live with such rates for the next 15-20 years. If the above strategy is successfully implemented, we would only have such a burden in the first five years and then could financially relax relatively well. By the way, the family planning is already complete, and we both have very secure permanent jobs.

What do you think of this approach?

It is a bet, the fastest horse will surely win again now. It has also won by a wide margin the last 10 times. The only question is, what if it gets injured??

Harakiri is your plan but possible.

The goal would be to repay about €125,000 in the first 5 years and only then focus on the final financing plan with significantly more attractive conditions, since the loan-to-value ratio would look much better in 5 years than now.

Is he doing that? In 5 years it will no longer be a new property, but a used one with corresponding discounts, which may be higher than the increase in value you calculated.

I think the likelihood that interest rates will rise sharply in these five years is very low.

I agree with you. The probability is low.

Banks often value the difference between 5 and 10 years fixed interest at about 0.1%, which basically means from their perspective that the situation in five years will not be much different than in ten.

Then why not fix it for 10 years with a prepayment option? Then you have 10 years to repay heavily. Calculate how high the interest rate can rise for it to be worthwhile.

With the successful implementation of the above-mentioned strategy

I don’t see a real strategy. Why choose the low rate only after five years? Why not 6% annuity for 10 years? Then you would have repaid heavily and still have a lower rate than with your strategy. Refinancing risk tending towards zero. Especially if you make a prepayment in between, since you have more monthly available than with your strategy? Or simply fix for 20 years with low repayment and thus a low rate. That’s not much more expensive but much safer. Or a loan with installment adjustment options that you can adapt to your wishes in between. Or or or...

How long would the fixed interest period be with the KfW? Also 5 years or 10 years? Not that after 5 years you are bound to the bank because of the KfW... Otherwise understandable. Personally, I would tend towards 10 years. After 5 years you can do a forward contract or a building savings contract if it is foreseeable that the interest rate situation will turn out differently than planned...

You write about unattractive? If you choose a long fixed interest period, it is correspondingly higher. Would you like to post the interest rate you have? Otherwise, I agree with the previous speakers, it can fit, but doesn't have to. And especially in the first years after construction, you don't repay much or save on the side. A lot adds up there.

Banks often assess the difference between 5 and 10 years of fixed interest at approximately 0.1%

Then it's clear that you naturally choose 10 years. But enlighten us on which repayment rate you assume. And don't come at us with 2% now. Edit: It should probably be a bit over 6% repayment rate, right?