Purchase an existing house. Please evaluate the offer

Hello everyone,

like many others, we are planning to purchase an existing house. We have a financing offer that I would like you to evaluate. Below are all the necessary facts:

General information about us:

We are married, 35 and 36 years old, have three children, and do not plan to have more. I am a salaried IT specialist working 35 hours a week, and my wife is a civil servant working 36 hours a week.

Income and asset situation:

Our net income including child benefits is 6100€. As equity, we want or can contribute 50,000€.

Expense situation:

We have categorized all transactions of the last 2.5 years and calculated generously. After deducting saving rates and additional costs related to the house, we have an amount of up to 1600€ available as a monthly rate.

General information about the property:

It is a prefabricated house in wooden panel construction from 1993. The plot is 540m², including a double garage.

Construction or purchase costs:

The purchase price for the house is 372,000€. Additionally, estimated renovation costs of 115,000€ apply, of which 15,000€ are to be contributed as own work. The incidental costs amount to a total of 42,594€.

Cost summary:

This results in a total sum of almost 530,000€, and after subtracting the equity of 50,000€ and the own work of 15,000€, a financing amount of 465,000€.

Necessary loan details:

The following offer has now been made to us:

Component 1: Interest-only loan

Loan amount: 338,000€
Nominal interest/effective interest rate: 2.20% / 2.32%
Interest fixation period: 15 years
Monthly rate: 620€

Component 2: Annuity loan (AD)

Loan amount: 100,000€
Nominal interest/effective interest rate: 1.92% / 1.96%
Repayment rate: 1.5%
Interest fixation period: 10 years
Monthly rate: 285€
Optional special repayment: 5% p.a.
Calculated term: 43 years
Outstanding balance at the end of the fixed interest period: 83,326.37 €

Component 3: General consumer loan (AVD)

Loan amount: 27,000€
Nominal interest/effective interest rate: 5.39% / 5.53%
Repayment rate: 4.346%
Interest fixation period: 5 years
Monthly rate: 220€
Calculated term: 15 years
Outstanding balance at the end of the fixed interest period: 20,283.44 €

Component 4: Building savings contract (Bausparvertrag)
Building savings amount: 338,000€
Fixed saving contribution: 425.00 €
Target allocation: in 15 years
Contract fee: 3,380.00 €
Further information is based only on verbal statements: The allocation presumably occurs at 30%, the interest rate after allocation is probably around 2%.

The total monthly rate would thus be: 1550€.

Overall, I do not feel completely comfortable with this offer. With the 425€ for the building savings contract, you only reach about ~22% at the targeted allocation time without special payments, which means that special payments definitely have to be made to avoid falling into an "interest trap" after 15 years with the interest-only loan. Also, the short interest fixation period of 5 years on the AVD with a term of 15 years is, in my opinion, a risk. The same applies to the AD with the interest fixation of 10 years, although the term of 43 years makes me rather suspicious.
Am I being too critical about all this? I look forward to your opinions. Thank you very much!

No, you are not being too critical, the offer is rubbish. But a few more questions about the initial situation: What do you want to renovate / convert in a house from 1993 for €115,000? That is already close to a complete renovation, which shouldn’t really be necessary. What is included in the additional costs? Taxes, broker, notary, land registry?

Why don't you just calculate a plain ordinary annuity loan, what you have in front of you is nonsense to the power of three. Who comes up with the idea of an interest-only loan given the total amount? Who taught you that?

Thanks for your assessments! So my gut feeling didn't deceive me...

: Yes, the additional costs include the broker, land register, tax, and notary. The house is currently still partially used as a guesthouse, which means some remodeling work is necessary.

Postbank???
We also had 2 conversations, they were the most inflexible, most arrogant, and by far the worst offers.

I would definitely not get involved with these consumer loans. You can’t burn your money faster. Especially since you only have a 5-year fixed interest period and then you don’t know what the conditions will be. If something like this really cannot be avoided, then repayment should be in 5-8 years. Anything else makes no sense.

There are many opinions on the topic of building savings contracts. I also have one for a partial amount to have a certain interest rate security over the entire term. But you also pay for that. You have to weigh that for yourself. We got quite good conditions for the annuity loan that we would not have gotten for a pure annuity loan, which somewhat compensates for the extra costs.

What stands out besides the consumer loan:
Building savings contract:
- You want to take out a building savings contract and don’t even know exactly the interest rate after allocation? That is exactly the parameter why you take out a building savings contract in the first place. If you end up at 2.5% or higher, then you can forget it right away.
- If the allocation only occurs at 30%, then you need exactly 20 years. That means you have an interest rate uncertainty of 5 years in between, where you have to bridge the full €338,000. That is the second point where the building savings contract in this constellation makes absolutely no sense, so either 20 years fixed interest, a higher rate, or earlier allocation (20% or 25%).
- How long should the entire financing of the building savings contract take? After 20 years you have paid off 30%. Then you are in your mid-50s. If you want to have it paid off by 70, then you will probably have to manage at least double the rate (so €2,000 instead of roughly €1,000).

Annuity loan
- The interest rate seems okay at first, especially since you repay little (interest rates below 3% are often worse).
- As you have already correctly seen, the term of 43 years is relatively long (then you are almost 80!!!!) and that with only a 10-year interest security. If interest rates rise to 3% in 10 years (just one percentage point), you will repay over 53 years at the same rate. So more likely your children then.
- After the 10-year fixed interest period, you still have a remaining debt of €83,300 from the €100,000!

Let’s simply calculate your first 15 years as constant (so 15 years fixed interest).
Then you have repaid €130,000 and still owe €335,000. Of that, only €250,000 is interest-secured (the 70% of the building savings contract). In these 15 years you paid €150,000 in interest!!!!!!! I think by this point it should be clear that you cannot fall into the interest trap, you’re in it from the beginning. Additionally, to me, the question arises of how you want to repay the remaining 70% in the next 15 years (then retirement starts). You must have significant salary increases for that.

The main problem from my point of view is that you want to borrow more money than the house costs. Generally, modernization costs are not recognized 1:1 as increased value. Therefore, the house is never worth €500k to the bank afterwards. So, despite equity, you have 100% or even 110% financing. If you cannot get away from that, the offers will be relatively poor and there will be constructions like the one above. It is worth visiting many banks here because the value assigned to the property during renovations varies greatly. However, I find it extremely difficult to understand how a house from 1993, which now has a value of €370k, should significantly increase in value through an additional €115k. If you cannot find an answer that convinces the bank, you will not get far.

Basically:
Is the rate of €1,550 your pain threshold? If yes, I would reconsider the undertaking carefully. As you can see from the calculations above, the financing does not work like this. If I calculate with a 2% fixed interest period (which will be very hard for you to achieve), you could be done after 27 years with a repayment rate of 2.8%. That would be a rate of €1,850. If you finance for 31 years, that would be 2.4% repayment and €1,700. But then you will be finished exactly at retirement (no early retirement). Under normal circumstances, 3% repayment would be advisable, but then you would be at about €2,000 rate. Think carefully about what you can actually afford. Over 30 years there will also be one or two more investments in and on the house. Heating costs will not decrease to the level of today’s low-energy houses despite modernization (we already have ancillary costs of at least €500 per month (built in 1988)).

The loan amount is too high for the intended installment. The rest is just the logical consequence of this. With €6100 pM liquidity, one can imho also put a few hundred more per month, but you should decide that yourselves. Additionally, the low equity for this volume ... leads to poor conditions. Significantly increase the installment or abandon the plan and build up equity.