Subsequent change of the lending value - What happens?

Hello everyone,

I have a question regarding the simplified loan-to-value ratio (loan amount / construction costs), which is quite decisive for the financing conditions.

We are building with an architect and do not yet have all the quotes for the individual trades. Therefore, most of the cost breakdown so far has been estimated by the architect. We are currently in the financing planning phase and have already had initial discussions with several banks. It turned out that, unsurprisingly, the limit of 60% for the simplified loan-to-value ratio (LTV) is quite decisive for the conditions. Depending on the estimated costs, we are currently slightly above the 60%. Hence my question.

How does the bank handle it if, after construction and upon submission of the final invoice, it turns out that the LTV assumed in the financing is not correct?

For the diligent readers here is a detailed version of my question with an example:

According to my information, inventory costs (such as lamps or kitchen) are not included in the calculation of the simplified LTV, but the costs of the outdoor facilities (such as paving) are included. Assuming one knows exactly what costs will be incurred, one can influence the LTV through the cost estimates. The following numerical example involves total costs of €570,000:

Construction costs: €500,000
Estimated outdoor facilities costs: €50,000
Estimated inventory costs: €20,000
Loan amount: €325,000
Simplified LTV: 59.1% [=325,000 / (500,000+50,000)]

Construction costs: €500,000
Estimated outdoor facilities costs: €40,000
Estimated inventory costs: €30,000
Loan amount: €325,000
Simplified LTV: 60.2% [=325,000 / (500,000+40,000)]

By shifting the estimated costs between the component included in the LTV calculation (outdoor facilities) and the component not included (inventory), the LTV changes to above or below the relevant 60% threshold. Let us assume here that there is no transitional range and that the conditions would change abruptly.

Assuming you indicate cost estimate variant 1 during planning in order to achieve an LTV below 60%. After the construction phase, the costs are exactly as in variant 2. How does the bank handle this? I can imagine the following:

a) I only get a loan corresponding to 59.1% (original LTV) on the now final costs (500,000+40,000), i.e. €319,140 instead of the planned €330,000
b) I do get the €330,000 but must pay an additional interest surcharge because the LTV based on final costs is 60.2% and not 59.1%.

This raises the question of how the bank handles the opposite case, i.e., if the LTV falls below 60% after the construction phase.

The numbers are purely examples and serve only to illustrate the question. I am very grateful for your input and apologize for the quite lengthy question.

Best regards

Robin

Then you collect all receipts for lawn, etc. If you exceed 60%, the bank could adjust the interest rate

I just had something similar. Due to unexpectedly more equity contribution, the construction costs decreased and the value increased at the same time. At the same time, we can invest more equity in outdoor facilities, which in turn increases the value. If we had known this before signing the financing agreement, the conditions would have been better. Now we are "unlucky."

What is stated in the financing contract counts.

Similar happened to me just now. Due to unexpectedly more personal contribution, the construction costs decreased and at the same time the value increased. At the same time, we can invest more equity in outdoor facilities, which in turn increases the value. If we had known this before signing the financing agreement, the conditions would have been better. Now we are "unlucky". It means what is stated in the financing contract counts.

Unless your situation worsens... then the bank could adjust.

Don't make life so difficult for yourself, enter a fictional €5-10k equity for the outdoor area, that way you lower your loan-to-value ratio, whether you actually want to afford it is another matter. I am explicitly talking about the outdoor area here. Such things should definitely be avoided in the house construction costs, because then the money is really missing. I did that, among other things. I got to 79% loan-to-value with €3k equity.

Suppose that during planning you specify variant 1 as the cost estimate in order to get under 60% Loan-to-Value (LTV). However, after the construction phase, the costs amount exactly as in variant 2. How does the bank deal with this? I can imagine the following:

a) I only get a loan of 59.1% (original LTV) on the now final confirmed costs (500,000+40,000), so 319,140€ instead of the planned 330,000€
b) I do get the 330,000€ but have to pay an additional interest surcharge, since the LTV based on the final costs is 60.2% and not 59.1%.

Afterwards, exactly one thing happens: Nothing! Neither positive nor negative for you. Once the contract is signed, it applies to both parties (except see the post from HilfeHilfe – but a lot would have to happen there, and the interest is not adjusted, but the bank is entitled to an improvement of collateral or a right of termination).

The loan-to-value is no longer adjusted afterwards. The bank has already refinanced and provided you with a loan agreement based on this. You have to live with that . The loan-to-value is a sustainable value that is not just changed because of a few euros.