raffa
2017-06-28 16:29:19
- #1
So, I want to give an update. We actually went to the bank and discussed the matter. They were very open to our plan, which honestly surprised us. We thought they would rather dismiss us. But the opposite... they worked out an immediate solution with us and even cautiously encouraged us to go ahead. In the end, we left the conversation with a great feeling, but still uncertain, as the bank is of course not doing this out of pure charity.
It could work like this:
The bank gives us a second loan, say as an example €500,000. Interest either variable or fixed for, for example, 2 years. With this loan, we could buy the land and build the house.
2. We would then have to sell our current house over time. The money from the house sale would flow into repaying the 2nd loan, with which we built the new house.
3. We keep our current loan on the current house. This loan would simply be transferred to the new house after selling the old one. Advantage: terms remain the same, repayments already made remain, no prepayment penalty. - I don’t see any disadvantage here, do you?
4. During the construction phase, we would have to service the existing loan plus the interest on the new loan. We could easily manage this, since both of us are full earners.
5. The bank would even, if it gets tight, allow the current loan to be repayment-free for up to 2 years. Meaning, we would only pay interest. Of course, the term would then be extended.
6. At times, we would have land charges exceeding €1 million until the house is sold *whew*
Now the risk I see: if we get less than planned from the house sale, we have to take on the difference in the form of additional debt. Example: if the house sale yields less than €500k, say €470k, then we would have to borrow and repay an additional €30k. I consider the probability 50/50, since our price is in the upper third. But compared to existing properties from the 70s, it is very attractive. Still, it somewhat restricts the buyer pool initially. However, the infrastructural location is excellent and the price is comparable to existing properties. Older houses from the 70s sell for similar prices plus the need for renovations.
The other risk could be that we don’t manage to sell the house and would then have to rent it out. In that case, there could possibly be a difference between achievable rent and the loan rate to cover. Probability of occurrence: about 20% - I think, ultimately, it is only a matter of time with the current market.
Interest rate risk: with a variable interest rate, we could get into trouble if construction interest rates rise. Although here too: we would not repay principal but only pay interest, so this wouldn’t really be a big deal.
What have we overlooked? What other risks do you see? Is this a good deal? To us, it sounds like a fair deal where the bank naturally also earns, but ultimately lets us come out pretty well... keyword prepayment penalty!
What do you think?!
It could work like this:
The bank gives us a second loan, say as an example €500,000. Interest either variable or fixed for, for example, 2 years. With this loan, we could buy the land and build the house.
2. We would then have to sell our current house over time. The money from the house sale would flow into repaying the 2nd loan, with which we built the new house.
3. We keep our current loan on the current house. This loan would simply be transferred to the new house after selling the old one. Advantage: terms remain the same, repayments already made remain, no prepayment penalty. - I don’t see any disadvantage here, do you?
4. During the construction phase, we would have to service the existing loan plus the interest on the new loan. We could easily manage this, since both of us are full earners.
5. The bank would even, if it gets tight, allow the current loan to be repayment-free for up to 2 years. Meaning, we would only pay interest. Of course, the term would then be extended.
6. At times, we would have land charges exceeding €1 million until the house is sold *whew*
Now the risk I see: if we get less than planned from the house sale, we have to take on the difference in the form of additional debt. Example: if the house sale yields less than €500k, say €470k, then we would have to borrow and repay an additional €30k. I consider the probability 50/50, since our price is in the upper third. But compared to existing properties from the 70s, it is very attractive. Still, it somewhat restricts the buyer pool initially. However, the infrastructural location is excellent and the price is comparable to existing properties. Older houses from the 70s sell for similar prices plus the need for renovations.
The other risk could be that we don’t manage to sell the house and would then have to rent it out. In that case, there could possibly be a difference between achievable rent and the loan rate to cover. Probability of occurrence: about 20% - I think, ultimately, it is only a matter of time with the current market.
Interest rate risk: with a variable interest rate, we could get into trouble if construction interest rates rise. Although here too: we would not repay principal but only pay interest, so this wouldn’t really be a big deal.
What have we overlooked? What other risks do you see? Is this a good deal? To us, it sounds like a fair deal where the bank naturally also earns, but ultimately lets us come out pretty well... keyword prepayment penalty!
What do you think?!