Savings beginner with questions about the plausibility of the "rough" plan

I see it in this case also as the construction project being affordable compared to the income, hence the good interest rate. I would find the repayment rate quite low considering the uncertainty, but with the salary, the special repayment is easily possible and then it works even without equity. My construction project was much more expensive compared to the income, but I could show a lot of equity and got the same overall interest rate for the loan (although the interest rate level was slightly higher almost 3 years ago).

Sorry, I unfortunately had little time this week, but the topic still fascinates me (sorry also @Mattheu).

: but the 3% are not correct in the long run (hey, and with these sums you can also get more than 1% interest). According to the Federal Statistical Office, from 2000 to 2014, the average for new builds! is overall just under 1.5% ("old" federal states, in the new ones the increase in costs is even lower!).

In addition, you could also compare the different values of the buildings in 2036 (20 years old and worth 350k vs 10 years old for 470k is a difference in sales value!). But the result only shows what I have been saying all along; probably not clearly enough (?).

The chosen period from 2000 to 2014 distorts the result because, as we know, since 2008/2009 we have been experiencing the "financial crisis," and that has (had) a huge impact on construction interest rates. These, in turn, are precisely what is currently fueling the trend toward homeownership, and in this market environment, prices inevitably rise. If my estimated 1.5% still come out of this, it supports my assumption.

A different value of the buildings to be compared arises, by the way, only through age (depreciation), which has already taken into account via the reserve for maintenance. Otherwise, the "standard" is almost identical.

No one criticizes the assumptions. It is the "nature" of an assumption that it is an estimate, and no one knows how it will develop further; likewise, that it can vary individually. Otherwise, it would be a fact. Therefore, you cannot calculate a universally valid "formula" for the best equity ratio, not even monetarily. You can only estimate with the most concrete assumptions for your own current situation whether it is better to save or not – and weigh the financial difference against risks and advantages/disadvantages.

We should set up a table with input of assumptions and display of differences at the end, so everyone who wants to know can enter their situation.

It is certainly correct that you cannot establish a "universal" rule regarding the "optimal" equity ratio (nevertheless, wild percentages are continuously mentioned). But why does that exclude a formula? A formula is precisely intended to produce a result from any (individual) parameters.

The fact that assumptions are used (also) is a problem that affects everyone equally (returns, construction prices, requirements, loan interest, etc.). Anyone bothered by this should better not even think about saving equity first, because in that case they would have to deal with even more assumptions.

I think you misunderstand the "big" context here. I actually did not finance the car, but still the house. Ultimately, debts are always debts, but if I finance a car, that is possibly more expensive (interest, especially if I really want to finance 100%) than the house. Otherwise, I could argue that I consume "financed" meals every day because I still owe the bank money for the house. And I only write on financed paper. And my PC too! (aside from that, I have already made the maximum special repayment for the house, so nothing lies around unnecessarily).

It is somehow clear that higher repayment saves compound interest, but that concerns equity savers and non-savers equally and then does not fit the topic again. If you compare, then also equal conditions and the same "procedure" or expenses.

Otherwise, the costs of saving are not that high, depending on the calculation, and in both cases we are not talking about money one has, but (if the house is not sold) about who has less/no debt after 30 years. But 20 years earlier, one also does not have the money for a car or for his children or whatever.

But the important years are in between – especially, as said, the first years – if you finance without equity, the first 15 years are certainly harder, more risky, because you have no reserve.

House, car, vacation, whatever – you borrowed money and pay your interest year after year on it. These are naturally, thanks to the financing method, lower than they would be for a normal consumer loan, but you pay them longer. Just calculate where you pay more interest: 10,000 euros at 2% over 15 years, or at 5.5% over 5 years.

And yes, one indeed consumes financed meals, writes on financed paper, and types these posts on a financed PC powered by financed electricity; I already wrote that everyone with debt has this problem.
This, in the end, affects almost all homeowners, but my point was only that losses during the saving phase (which logically does not concern the "non-saver") are missing elsewhere and might be invested "more sensibly" there (but that leads too far here).

And with that, we are again at the evil losses. We can argue for a long time about the exact amount and still reach no conclusion because we do not know, for example, how the interest rate level will develop in the next 10 years. But you unquestionably pay rent during the savings period and the increased construction costs. On the other hand, there is the return on your saved capital. If construction interest rates fall or stagnate, you additionally save through lower interest burden; if interest rises, this item is added to the costs – overall an impressive sum in any case.

Whether additional costs arise someday for car, children, vacation, etc., plays no role in this consideration. We look at a 30-year period and see what "Hans Meier" spends in total on his house. Whether Hans Meier has planned enough buffer, spends his vacations on the North Sea or Seychelles, drives a Kia or BMW, has two or nine children – all irrelevant, as it is always identical because we consider his financing (or the alternatives) and do not compare with Max Mustermann.

This "optimal" unfortunately varies greatly from case to case. Most of the time, forum participants answering user questions take the information from the questioner into their consideration, so you cannot generalize as a "dogma" here. Otherwise, I think there is agreement on "at least ancillary costs" (which are quickly 40k+ depending on land preference) +x% being discussed.

I think we should determine the parameters for calculation (which ones, not how high) and create a table so everyone can decide for themselves how much risk they want to take or when which variant is better for them.

That's exactly what I don't believe. The only thing that varies from case to case is the possible installment amount and maximum term and, as a result, the maximum loan amount at a given interest rate level, or alternatively the savings rate.

We do not need to worry here about the construction of financing (building society contracts, follow-up financing, etc.), possible subsidies, different interest rates from different banks, feasibility studies, or discussions about living costs because these points are already reflected in the installment or loan amount, or apply equally to all. The "optimal" (financially speaking!) ultimately depends only on the ratio "total expenditure: building sum," and that's what we are talking about.

Since the ratio of total expenditure to construction sum is always identical with the same interest rate and the same term, it does not matter which construction sum or interest rate one chooses as an example. If one presents in a table the installments for any construction project (110%) at interest rates between 0.5% and 10% over a term of 30 years, the ratio of "total expenditure:construction sum" ranges from 1.08:1 to 3.16:1.

Anyone who has more "free" income than needed for their construction project can use this to shorten the term; therefore, here are also the ratios for shorter terms:

Over a term of 25 years, the ratio is 1.06:1 to 2.73:1
Over a term of 20 years, the ratio is 1.05:1 to 2.32:1
Over a term of 15 years, the ratio is 1.04:1 to 1.93:1
Over a term of 10 years, the ratio is 1.03:1 to 1.59:1
Over a term of 5 years, the ratio is 1.01:1 to 1.28:1

So depending on the interest rate and term, one pays back between 101% and 316% of the original construction sum to the bank when financing "110%" without equity. We are now interested in how these figures change through the use of equity.

I will now take €400,000 as an example and assume a savings rate of €1,500 (corresponding to the installment that would be due without equity for this construction sum at 2.11% interest over 30 years; total expenditure: €540,000, ratio 1.35:1) and calculate the saving period for the equity with a cost increase (1.5%) over the saving phase. Rent is initially set aside!

10% of 400k = 40,000 / 1500 = 26.67 months = 2.22 years

30% of 400k = 120,000 / 1500 = 80.00 months = 6.67 years

50% of 400k = 200,000 / 1500 = 133.33 months = 11.11 years

Since price increases are calculated annually and not daily, I take for 10% the price increase after 3 years, for 30% the price increase after 7 years, and for 50% the price increase after 12 years as the basis for further calculation of equity in order to compensate this price increase through saving.

After 3 years, the 10% equity saver has saved €55,259 at 1.5% return. The house now costs €418,271. That is 13% - quota fulfilled.
After 7 years, the 30% equity saver has saved €132,885 at 1.5% return. The house now costs €443,983. That is 29.93% - quota fulfilled.
After 12 years, the 50% equity saver has saved €236,649 at 1.5% return. The house now costs €478,247. That is 49.48% - quota fulfilled.

This results in the following loan and ratio of total expenditure to construction sum:

10% equity: €418,271 (construction sum) – €55,259 (equity) = €363,012 loan. At a constant rate of €1,500/month and a desired decision point after then still 27 years, the interest rate should be at a maximum of 2.27%. The ratio "total expenditure:construction sum" then amounts to 1.29:1. If the interest rate is still 2.11%, the term shortens by 8.5 months, and the ratio would be 1.26:1.

30% equity: €443,983 (construction sum) – €132,885 (equity) = €311,098 loan. At a constant rate of €1,500/month and a desired decision point after then still 23 years, the interest rate should be at a maximum of 2.61%. The ratio "total expenditure:construction sum" then amounts to 1.23:1. If the interest rate is still 2.11%, the term shortens by 18 months, and the ratio would be 1.17:1.

50% equity: €487,247 (construction sum) – €236,649 (equity) = €250,598 loan. At a constant rate of €1,500/month and a desired decision point after then still 18 years, the interest rate should be at a maximum of 2.98%. The ratio "total expenditure:construction sum" then amounts to 1.15:1. If the interest rate is still 2.11%, the term shortens by 18 months, and the ratio would be 1.10:1.

But what happens if one actually "had" €2,500/month "left over" and financed the same house with it, that is, basically "builds smaller" than one could?

Without equity, at 2.11% interest on 400k, the term would shorten to 15.67 years and thus a ratio of 1.18:1.

Those aiming for 10% equity save 16 months; we calculate with the price increase of 2 years.
Those aiming for 30% equity save 48 months; we calculate with the price increase of 4 years.
Those aiming for 50% equity save 80 months; we calculate with the price increase of 7 years.

This results in the following remaining loan and remaining term of the same (based on the 15.67 years as the comparison period):

10% equity: €412,090 (construction sum) – €60,941 equity = €351,149 loan. At a constant rate of €2,500/month and a desired decision point after then still 13.67 years, the interest rate should be at a maximum of 2.32%. The ratio "total expenditure:construction sum" then amounts to 1.14:1. If the interest rate is still 2.11%, the term shortens to 13.46 years, and the ratio would be 1.13:1.

30% equity: €424,545 (construction sum) – €123,724 (equity) = €304,545 loan. At a constant rate of €2,500/month and a desired decision point after then still 11.67 years, the interest rate should be at a maximum of 2.43%. The ratio "total expenditure:construction sum" then amounts to 1.12:1. If the interest rate is still 2.11%, the term shortens to 11.43 years, and the ratio would be 1.09:1.

50% equity: €443,983 (construction sum) – €221,475 (equity) = €222,508 loan. At a constant rate of €2,500/month and a desired decision point after then still 8.67 years, the interest rate should be at a maximum of 3.67%. The ratio "total expenditure:construction sum" then amounts to 1.08:1. If the interest rate is still 2.11%, the term shortens to 8.07 years, and the ratio would be 1.04:1.

One can now interpret these many numbers:

Most interested parties will probably derive their desired monthly rate, i.e., they look at how much money is “needed” per month, and what is left over is then the installment. Now one can base this rate and simulate which interest rate over the desired term results in which loan amount, and that is then the maximum price that can be paid for a house. In the example, this is €1,500/month over 30 years at 2.11% interest, which then results in a loan of €400,000. But one could just as well take €1,000 installment at 3% interest over 30 years with a maximum loan of €237,000—the proportions do not change!

Those who start saving equity under these conditions (maximum loan amount is to be exhausted) can save between 9% and 25% of the original construction sum by indirectly shortening the remaining term with constant interest rates. In absolute numbers, this amount varies, of course, because different construction sums result from the differently long saving period.

Here, the current cold rent becomes interesting, as it destroys money over the duration of the saving phase. In the example, by saving 10% equity, one has saved 9% of €418,271, i.e., €37,644 in absolute numbers. This results in a maximum cold rent of €1,046 over the saving period of 3 years. Those who actually pay less save money; those who pay more rent effectively pay extra due to saving. For 30% equity, the rent should only be a maximum of €951, and for those who want to save 50%, rent should not exceed €846.

On the other hand, one also repays their loan somewhat faster in the end and can start saving again in the meantime. At 1.5% return, this yields €12,825 (10% equity) or €27,322 (30/50% equity).
For example, someone who pays only €500 cold rent and saves 50% equity has thus saved about €77,000 in the end.

Alternatively, instead of shortening the term (at constant interest rate), one could bear a slightly higher interest rate. This surcharge should be only about 0.16% to 0.87%; otherwise, it becomes more expensive.

The calculation without utilizing the maximum loan amount surprised me personally. Someone who has €2,500/month free could actually repay over €660,000 at 2.11% interest over 30 years. Yet if building only for €400,000, the 110% financier repays in only about 16 years, and the savings by accumulating equity in the same time frame amount to only between 5% and 14% (max cold rent: €859 / €796 / €740), while the shortening of the term ultimately only amounts to a few months and thus at best additional €15,000 can be saved.

Conversely, at a constant term, one could bear a higher interest rate. In this constellation, it can be between 0.21% and 1.56%.

tl;dr

Saving up equity in the current interest rate environment can actually lead to monetary savings, depending on the personal situation, if one gets an acceptable return on their savings, pays comparatively little cold rent, and expects to pay this over a long period (20 years or more). Higher equity quotas bring increasingly less in relation to the longer saving period and also entail enormous interest rate risk!

However, those who park their money in a checking account, already live in a rented house (and perhaps even regularly experience rent increases), and want to repay in a maximum of 15 years will almost certainly lose out by saving up equity.

Apart from the purely financial aspect, there are of course several reasons to still choose to save up equity. Whether it is protection against loss of income and resulting insolvency, or greater independence from the financing bank. On the other hand, the elimination of the waiting period for the home, which can sometimes be over 10 years, is also a comprehensible personal reason speaking against long saving phases.

The truth remains: I basically know little about the subject, so if anyone finds a mistake, feel free to point your finger at me and shout "Haha!"

XOXO

I still think that too many assumptions have to be made (so much is estimated) that even with correct calculations the results are not reliable. Even with the correct result, it does not seem to be certain whether it is financially worthwhile or not. It is still not so easy to say in general because the interest rates and securities are very individual – a civil servant couple with little equity will certainly get better interest rates than a self-employed person with about the same equity – just a rough example. Otherwise, I still have to object at this point that only the depreciation of the houses should be considered; the legal standards are certainly different after 7 or more years, and the price increase is not only the market but also the different 'construction method'. For example, electric shutters are increasingly being installed and so on (there is also progress in materials, etc. in house construction). Furthermore, inflation and salary increases are not taken into account. I claim that for a formula, there are altogether far too many parameters for it to make sense.

I basically agree with you regarding the assumptions. The only question is, "How should one deal with them?" Unfortunately, when it comes to home financing, you inevitably have to deal with various assumptions. This usually starts with the planned installment, "Can we really afford this?", continues with "What happens if income is lost?", and goes up to "What would the whole thing look like in 10 years? Will we have more money available/Are property prices at rock bottom/Are interest rates (still) lower?"

Basically, the rule here is: Those who are still saving have additionally to deal with estimating the future interest rate level. In this respect, 110% financing thus offers more "security."

Of course, depending on one's own situation, different interest rates are offered and there are different "securities" (civil servant vs. self-employed), but we are not interested in how someone else might possibly have a better starting position, but only in how the matter looks for the specific case.

Incidentally, I do not think much has to be estimated. The development of construction prices can be assessed relatively reliably (in most cases, you can even check in the respective town), the return on equity is also not subject to significant fluctuations, and even the interest rate level can be comparatively well forecast for 1-2 years. It only gets difficult with a horizon of 4/5 years and above, which only affects the "savers."

Regarding depreciation, one can argue. Surely stricter regulations will enforce a better standard somewhere and this definitely has also effects on construction prices, but the main drivers are more likely to be inflation (which includes higher wages) and the market environment.