Partial financing through guarantee / Joint construction

Hello everyone,

I would like to get your opinion on a financing option we are considering. The initial situation is as follows:

- We (mom, dad, 2 children) want to build a single-family house with a separate granny flat for the mother-in-law.

- The mother-in-law owns a debt-free multi-family house (approx. value: 400,000 EUR) with 3 apartments; she currently lives alone in one of these apartments.

- The plan: To participate in the construction, the mother-in-law wants to mortgage her existing house and take out a loan (Loan B), which she will contribute to the construction of our project. The ongoing rental income (total cold rent approx. 1,600 EUR monthly) from the existing property shall be used to service this loan and, in addition to the upcoming pension, to cover living expenses.

- My wife and I will also take out a loan for the new construction (Loan A).

- Approximate equity we will contribute: 50,000 EUR
- Approximate amount Loan A (us): 280,000 EUR
- Approximate amount Loan B (mother-in-law): 120,000 EUR
- Approximate total project costs: 450,000 EUR

The following conditions apply:
- No right of residence is to be agreed upon (due to creditworthiness reasons)
- My wife also has a sister who, in the event of the mother-in-law’s death, is also entitled to inherit (50% of the multi-family house)
- The mother-in-law should of course not pay cold rent in the new building

What do you think about this? What risks exist? What should one pay attention to? Are there certain things that should be clarified with the sister beforehand? Would it make more sense to sell the house, pay out the sister, and have the mother-in-law contribute the equity in cash? Or is this idea inherently rather a bad one?

Thank you very much for your input!

So basically a good situation. Having another house as collateral is always the best thing for the bank.

Why should part of the financing be carried by your mother-in-law?
What does your income situation look like?

Why should part of the financing be covered by your mother-in-law?

So that we can manage this large project at all. We would have normally built smaller. We couldn’t achieve this out of our own funds.

What does your income situation look like?

Currently €3400 net family income, prospectively about €4200 plus annual bonuses according to TVÖD, both jobs in the public sector permanent. Equity as mentioned about €50,000.

Best regards!

Ok, I understand, then it would be easier to handle the financing only through you and the mother-in-law contributes a part in the form of rent. The bank accepts that and it is significantly less effort for you.

The multi-family house can serve as collateral, even if the mother-in-law is not on the loan agreement.

What do you think about that?

You should first consult a lawyer or notary (contractual arrangements, inheritance law, etc.) and a tax advisor (rent).