Single-family home financing - thoughtful after first bank discussion

Good evening!
My wife and I want to build (have built) a single-family house. We have a plot of land, which we can also use as collateral for the required loan.

I had an initial informal conversation with my house bank.
Roughly, the "turnkey" KfW70 house including kitchen, garage, painting work, and floor coverings costs €240,000. Additional connection costs, incidental construction costs, etc., will be added.

€240,000 would be the amount we need to borrow, as our equity (about €40,000) will be used up for the connection, incidental/surveying costs, etc.

€190,000 would come from the house bank, €50,000 from the KfW bank.

Currently, we are both employed and earn about €100,000 gross per year. So almost "high earners," but at least "good average earners."
Each of us has about €2,300 net per month.
But if my wife possibly stays at home later due to a child, I would be the sole earner. My advisor said that would be tight: After deducting living expenses, house-related costs, etc., I would only have €800 - €1,000 per month to pay interest and principal.

I don’t think our house is oversized (about 150 m2 living space), and I find the construction costs reasonable; why shouldn’t a "normal earner" be able to finance a house and family?

My parents definitely didn’t have (converted) DM 4,500 monthly available and paid off their house completely after 15 years (ok, more personal contribution and more equity, but still…)
I am willing to temporarily restrict myself for the house (forgo vacations, etc.). But I can’t believe that we are really so badly positioned...
I would like to exchange views with you on this.
Best regards
James

P.S.: Of course I will have talks with other banks once I know exactly how much everything will cost; but the first conversation did make me quite thoughtful.

Well, first of all, it depends on how long your wife stays at home with the child. One year, two years, or longer.

With one to two years and then resuming work – at least part-time – it would probably be less problematic. Comparing it to "earlier" unfortunately doesn’t help, because we are living in the present.

There is hardly any more of the "classic" sole breadwinner. When I started looking around and familiarizing myself with financing, I kept asking myself: How the hell do others do it?! I don’t earn bad money either and simply couldn’t imagine that everyone else building a house either earns more, won the lottery, or robbed a bank.

But the secret is: 1% initial repayment rate. You get for 10 years 2.8% effective interest 240,000€ at 760€ per month. That sounds picturesque! And why pay rent then. That’s how it’s done... NOT! Because after 10 years you end up with a remaining debt of over 212,000€ and have merely postponed the financing problem.

If you want to have repaid 240,000€ in 15 years, you have to spend about 1,700€ per month at an assumed 3.20% effective interest rate or make substantial additional repayments – but even then, the money has to come from somewhere. (to compare it with your parents’ example).

800€ - 1,000€ per month doesn’t sound like a big difference, but (effective interest still 3.2%):

- with 800€ monthly, you would be nibbling on your loan for 50 years
- with 1,000€ monthly, only 30 years

The rule of thumb from a banker I know is: for every 100,000€ loan amount, you should reckon about 500€ monthly burden to manage it within a reasonable time frame. With the currently low interest rates, it can be somewhat cheaper, but it is absolutely realistic.

For your case, that would mean (effective interest still 3.2%):

Loan: 240,000€
necessary budget: 1,200€
remaining debt 0€: after just under 24 years

Now you can of course also extend the term. This reduces your monthly burden but also increases the remaining debt after X years.

These are all just calculation examples. The rest will surely be told to you by your bank advisor – who incidentally seems sensible. In the end, please don’t run to the one who calculated the lowest rates for you and told you tales. Because such a person cares least about how you and your family will be doing in 10 years – with or without a house.

The banker seems quite reasonable to me. A good man. At least he doesn't belong to the type who insists on sugarcoating everything at all costs. The question of why an average earner can't manage to finance a house is more of a philosophical nature, but still, many more people should ask themselves this question and refrain from buying/building a house, instead of struggling financially for decades and/or risking having to sell the house again at some point because they can't maintain it. Why could your parents do it with 4500,- DM? Because 4500,- DM was a lot of money back then or the money still had value. 4500,- EUR, on the other hand, is not worth much nowadays. In the end, this question can only be answered with a counterquestion: Why does everyone nowadays think they have to own a house? From my childhood, I know that owning a house was more a privilege. Back then, you either inherited a house or received a plot of land from your parents and built on it mostly through your own effort. And the houses that were built were sometimes so small that today hardly anyone would want to live in them. The "average earner" used to rent. Only higher earners/wealthy people had decent houses back then. Don’t get me wrong, this is not directed at the topic starter, but it is not written in the Basic Law that every German citizen has the legally guaranteed right to afford their own house, 2 cars, always the latest phones/computers, 2 children, a dog + three holidays a year. However, if you listen to the opinions of the "normal" population layer, one could almost think that it was...

Yes, but with a 1% repayment and low interest, many are exactly given this idea.

Of course, they get that drilled into them because the banks want to do their business and they ultimately don't care. If the loan can no longer be serviced, the bank simply owns one more property. But of course, you can't fully blame the banks for this. People are often also quite naïve. If you are presented with a repayment plan that still shows a remaining debt after the loan term ends on time, you should normally burn it right in front of the banker's eyes...

Depends on how you really plan the repayment. For our mortgage, we only chose 1.5% repayment, although significantly more would have been possible (income conditions are similar to yours, only the loan is somewhat higher). In practice, we will try to use our annual special repayment rights of 5%, provided nothing extraordinary happens. The monthly portion (one twelfth) of the maximum special repayment is put into a separate account. This gives us enough leeway for finances and quality of life; if we really always use the special repayment, we will be done with the loan in about 12 years, the fixed interest rate term is 15 years.