Rule of thumb for financing

I have already read quite a few threads here.
However, it is still not entirely clear to me how some people can assess the financial situation of the thread starters, etc.
(except from experience, logical thinking, and the like)

For example, I know the rule of thumb that rent should not exceed one-third of the net monthly income.
Do you also apply this to home financing?

That would mean, with a net income of, for example, €2000, one would have a maximum monthly installment of €666.

Well... That would be considered the cold rent for a rental house.

Therefore, the question is how do you determine what you can afford and what you cannot, and which factors are taken into account?

Is a monthly installment used to estimate affordability also referred to as "cold"? That means additional costs for heating, electricity, etc., still have to be added?

How can one assess financing on their own without having everything precisely documented?
There are surely benchmarks, such as for electricity consumption for a household of x people.

I would also be interested to know whether the property is simultaneously regarded as retirement provision or whether it is generally assumed that one sets aside some extra money separately.

And the final question, how much percent of the net monthly income should the loan installment not exceed?

And then one more question.
How long should financing last at most?
After x years, a renovation/repairs become due as a rule, which in turn costs money and may possibly require a new loan as a consequence.

Hello Garfunkel,

there is no one right solution. The questions you ask lead to different answers, all of which are more or less correct.

A general approach is, similar to rent, that the loan installment should not exceed 40% of the household net income. Expenses like ancillary costs are always there, whether a comparable house is rented or purchased. Similarly, electricity consumption is the same whether renting or buying.

The best way is and remains an income/expense calculation with current values. Then you subtract everything that will no longer apply with a purchase and add what will incur additionally. Then you know how much money you still have left for a loan installment.

Another way is to take the current cold rent and add all the things you are willing to give up for the house purchase. This includes, for example, savings rates you have used for wealth building so far (if you do not want to continue this), also e.g. building savings installments, etc.

Financing should always be structured so that it is finished when income reductions are to be expected. Generally, this should be retirement, but it can also be 5 years earlier if desired. A rough guideline is a maximum term of about 30-35 years, whereby the borrower should not be significantly older than 30-35 years at the start. The later it gets, the more installment you have to bear.

Furthermore, there are always additional individual factors to consider.

Examples:
A farmer with livestock, fruit, and vegetable farm may have lower living expenses than a manager in the big city.
The extended family with relatives in the Eifel has lower vacation costs than the single person with a claim to world travel.
This list can be continued indefinitely.

It basically always comes down to an income/expense calculation.

And the rest is logical thinking. If someone tells me that they do not want to give up the 4-week South Africa vacation or the Porsche in the garage as a Nürburgring weekend car, then 500 euros per month must probably be set aside for that.

As long as you feel comfortable with it and your bank gives you the loan ;-) I would honestly not base it on %, but on your living expenses... if I earn 10,000 T€ per month, there's surely nothing against spending 50% on repayment; if I get 1,500 €, 30% is already tough. I once read that the average financing in Niedersachsen lasted 42 years. That was certainly due to the very high interest rates of past times. Much more important than the absolute duration is the risk you have at the end of the fixed interest period – if there is still a lot of the loan left and the interest rate rises, it can break your neck. Whether you consider your property as retirement provision is up to you – it is not tax-deductible.

Your questions are difficult to answer. Often, those giving advice here rely on their professional experiences. Often, one is also somewhat more cautious on the internet, as the advisor can never be entirely sure if they have all the information.
The principle that the monthly installment should not exceed 30–40% of income is one of the "stricter" rules. However, there are deviations from this rule here as well – depending on the available information.

I would evaluate the following 2 examples differently:
Net net total: 5,000 euros
current cold rent: 1,000 euros
additional costs: 200 euros
current living expenses: 1,500 euros
fixed costs: 1,000 euros
monthly savings rate Example 1: 1,100 euros
monthly savings rate Example 2: 200 euros

Desired loan installment: 1,700 euros

Example 2 states that he wants to adjust his lifestyle with the house construction so that he can bear the burden.

In Example 1, I would have significantly less worries because he has already demonstrated through his past saving behavior that he can consistently restrict himself. In Example 2, financing would theoretically be possible – practically, the question arises as to how far he can permanently change his previous lifestyle (spending almost the entire income). Many (including myself) regularly have doubts here.

Additional costs rent = additional costs house (usually plan a bit more)
Electricity costs: You can usually assume the same value. Why should household electricity consumption increase when moving? Rather decrease, since one tends to purchase newer appliances.

Many choose the term so that they finish paying the loan upon retirement.
However, some have a different life plan – they are sure that they want to downsize after the kids have moved out and retirement begins. Hence, they do not mind that the loan is still partially open, as it is supposed to be paid off with the sale of the house. Both are models that can work. With model 2, there is a risk – what happens if the life plan changes after 30 years or if the home (for whatever reasons) loses significant value.

Many view homeownership as retirement provision. Living "rent-free" in old age is something special and preserves the pension (not to mention that repairs still have to be carried out). Many will also have another part running as retirement provision alongside the house (life insurance, statutory pension insurance, Riester plan, or similar).

Very often, the topic of children also comes into play when assessing financing. Couples who build without children often want to start a family later in the "finished" nest. These builders consider their current situation (as does the financing bank quite often). Financing works in the current situation as well.
But what happens if an earner drops out long-term? Have future costs for children already been considered? The plan that from point X both parents can work full-time usually fails in reality. Even part-time is difficult – I see this in our own situation (a 450 euro job is barely manageable). The discussion here should at least encourage not to completely ignore this point.
By the way, I generally have significantly fewer worries giving advice to families with children than to families without children, as families with children at least already know (partly) the costs.

One final point: Those who give advice here do not wish any harm to the advisee – even if they sometimes shatter or reduce the dream castle. Perhaps they are sometimes too cautious with their advice – but do they actually always know all the facts?
They provide advice here – the assessment of it as well as the decision is up to the potential builder alone.