Use equity correctly

Hello,

I have one more question that is on my mind.

We have a small amount of equity. Which option is better to use it? Or does it not matter at all?

Option 1: Purchase of the plot and financing of the house and ancillary building costs

Option 2: Financing of the plot and the house and payment of the ancillary building costs from the equity

Plot price and ancillary building costs are about the same amount. What would be better for us when discussing the construction financing with the bank?

Thank you very much.

Actually, it doesn't matter because an existing plot of land (i.e., a previously "cash" purchased or inherited or otherwise acquired plot) is considered as equity in the future financing, and a financing loan is viewed as a whole (land, house, ancillary construction costs, equity). 1) So if you buy now but want to build only in half a year or calculate financing, the conditions at that time apply. They can remain the same, go up a little, but can also be better.

2) If you have already financed (with cash equity), then you have to expect commitment interest. Usually 0.25% per month. In addition, you have to draw down the loan within a certain time. Planning idleness is then over; you would then be under pressure to build the house. There is usually also the requirement to use the equity in advance for the construction or purchase before the loan is drawn.

Option 1 would be more relaxed and sensible if you assume that the conditions will not increase significantly and your planning and the start of construction only take place towards the end of the year or the beginning of next year. However, you should factor in that some equity should be retained, e.g., for the kitchen.

Some here would probably be of the opinion that it is absolutely necessary to secure the favorable conditions now, but what do we know how things will develop?!

This is my half-knowledge on the subject because I have read up on it myself and am currently in the same situation.

Hello gerrko,

that really does not matter at all. Existing equity capital is included in the overall calculation of the construction project. Most financing banks require proof of the use of the specified equity capital before the loans are drawn. All expenses must be presented to the bank as invoice proof. A construction log must be kept for this.

What the equity capital is used for is ultimately not decisive. It is only important that it was used for the house construction and is spent before the loans are drawn. This must be proven.

Best regards

What about
- the purchase of tools needed to carry out work in self-performance?
- the purchase of materials from private individuals? (e.g., someone bought parquet flooring, no longer likes it, and sells it still in original packaging through a classified ad, how do I prove that?)

Thank you very much!

What about
- the purchase of tools needed to perform tradeswork yourself?
- buying materials from private individuals? (For example, someone bought parquet flooring, doesn’t like it anymore, and sells it still in original packaging via a classified ad. How do I prove that?)

Thank you!

Exactly for something like this, you should reserve at least €10,000 as equity. Then the question doesn’t arise. Our bank wanted to see an invoice for everything anyway.

I always advise you to keep some equity in reserve and only use it later. Otherwise, you have to run to the bank for every little thing and present an invoice...