ᐅ Is Buying Land and Building a House Too Risky in the Current Situation?
Created on: 24 Jun 2022 10:14
J
Julchen7393
Hello everyone,
After quietly reading along for a long time, I finally want to reach out to you with my first post to ask for advice.
My partner and I currently live in an end-terrace house (end townhouse) that we rent cheaply from my boyfriend’s parents – who inherited the house themselves. Since the size of the house is not sufficient for our long-term plans and a lot of money would be needed for renovations, we have been looking for a plot of land to build our own home for some time.
Now, a building plot in a new development area of our municipality has been returned, and we are eligible to apply for it. Because the plot is provided by the municipality, it is significantly cheaper (€420 per m² (approx. $440 per sq yd)) than the market price (€600–1000 per m² (approx. $630–1050 per sq yd)). All other plots are already developed or have building permits/planning permission applied for, so it’s unlikely that any more plots will become available.
Although the plot is probably a unique opportunity, we are very uncertain about the feasibility under the current circumstances and would appreciate your assessment.
General information about us:
Female, 29 (Controlling) and Male, 30 (Engineer)
No children yet, but we plan to have two children within the next 4-6 years (which is why we want more living space)
Financial situation:
Net income: €7000 (approx. $7400)
Current expenses: €3400 (approx. $3600)
Surplus: €3600 (approx. $3800)
Equity: €250,000 (approx. $265,000) – of this, we plan to put €200,000 (approx. $212,000) into financing; part of the remaining €50,000 (approx. $53,000) is tied up in retirement savings and should remain there
Construction costs:
Plot: 621 m² (6679 sq ft) at €420 per m² (approx. $440 per sq yd): €260,820 (approx. $277,000)
Additional purchase costs: €18,257 (approx. $19,400)
House construction: 150 m² (1615 sq ft) at €2600 per m² (approx. $270 per sq ft): €400,000 (approx. $425,000)
(We have an appointment with a construction company next week to see if this is feasible with significant DIY work)
Basement: €40,000 (approx. $42,500)
Garage: €25,000 (approx. $26,500)
Kitchen: €25,000 (approx. $26,500)
Outdoor facilities: €30,000 (approx. $32,000)
Total costs: €800,000 (approx. $850,000)
Financing requirement:
€800,000 - €200,000 = €600,000 (approx. $425,000 - $212,000 = $638,000)
The bank would approve a loan with our desired monthly payment of €2,500 (approx. $2650), but depending on interest rate changes, the repayment period without early repayments would be between 30 and 35 years.
We are particularly worried that our estimated construction costs are too low and that significant price increases may follow.
Also, the long loan term concerns us – given the planned children, we find it difficult to consider a higher monthly payment, especially since we both earn roughly the same and will face significant income reductions due to parental leave benefits.
For days now, we have been torn between “taking this once-in-a-lifetime chance to get an affordable building plot in town” and “the financial risk is too high in the current situation.”
We would be grateful for your thoughts on our plan and the expected construction costs.
Best regards,
Julia
After quietly reading along for a long time, I finally want to reach out to you with my first post to ask for advice.
My partner and I currently live in an end-terrace house (end townhouse) that we rent cheaply from my boyfriend’s parents – who inherited the house themselves. Since the size of the house is not sufficient for our long-term plans and a lot of money would be needed for renovations, we have been looking for a plot of land to build our own home for some time.
Now, a building plot in a new development area of our municipality has been returned, and we are eligible to apply for it. Because the plot is provided by the municipality, it is significantly cheaper (€420 per m² (approx. $440 per sq yd)) than the market price (€600–1000 per m² (approx. $630–1050 per sq yd)). All other plots are already developed or have building permits/planning permission applied for, so it’s unlikely that any more plots will become available.
Although the plot is probably a unique opportunity, we are very uncertain about the feasibility under the current circumstances and would appreciate your assessment.
General information about us:
Female, 29 (Controlling) and Male, 30 (Engineer)
No children yet, but we plan to have two children within the next 4-6 years (which is why we want more living space)
Financial situation:
Net income: €7000 (approx. $7400)
- Female: €3400 (approx. $3600) and Male: €3600 (approx. $3800) – both full-time 40 hours per week (with additional variable bonuses not yet factored in)
Current expenses: €3400 (approx. $3600)
- Fixed costs: €2200 (approx. $2350)
- €600 rent, €350 utilities incl. heating, internet, and electricity, €500 car expenses incl. insurance, €400 retirement savings, €350 other fixed costs (insurance, streaming services, etc.)
- Variable costs: €1200 (approx. $1265) – budgeted quite generously; we usually spend significantly less
- Living costs, vacations, leisure activities
Surplus: €3600 (approx. $3800)
Equity: €250,000 (approx. $265,000) – of this, we plan to put €200,000 (approx. $212,000) into financing; part of the remaining €50,000 (approx. $53,000) is tied up in retirement savings and should remain there
Construction costs:
Plot: 621 m² (6679 sq ft) at €420 per m² (approx. $440 per sq yd): €260,820 (approx. $277,000)
Additional purchase costs: €18,257 (approx. $19,400)
House construction: 150 m² (1615 sq ft) at €2600 per m² (approx. $270 per sq ft): €400,000 (approx. $425,000)
(We have an appointment with a construction company next week to see if this is feasible with significant DIY work)
Basement: €40,000 (approx. $42,500)
Garage: €25,000 (approx. $26,500)
Kitchen: €25,000 (approx. $26,500)
Outdoor facilities: €30,000 (approx. $32,000)
Total costs: €800,000 (approx. $850,000)
Financing requirement:
€800,000 - €200,000 = €600,000 (approx. $425,000 - $212,000 = $638,000)
The bank would approve a loan with our desired monthly payment of €2,500 (approx. $2650), but depending on interest rate changes, the repayment period without early repayments would be between 30 and 35 years.
We are particularly worried that our estimated construction costs are too low and that significant price increases may follow.
Also, the long loan term concerns us – given the planned children, we find it difficult to consider a higher monthly payment, especially since we both earn roughly the same and will face significant income reductions due to parental leave benefits.
For days now, we have been torn between “taking this once-in-a-lifetime chance to get an affordable building plot in town” and “the financial risk is too high in the current situation.”
We would be grateful for your thoughts on our plan and the expected construction costs.
Best regards,
Julia
B
Baufuchs200028 Jun 2022 22:29When reading the current comments and statements from central bankers, interest rates are expected to rise sharply and very quickly. We can realistically expect mortgage rates to reach 6–7 percent by the end of the year. No crystal ball needed for that.
Therefore, I would recommend locking in financing immediately. However, a significant increase in rates could also lead to a sudden drop in construction and land prices. Securing a forward loan and then waiting could be a good strategy.
Therefore, I would recommend locking in financing immediately. However, a significant increase in rates could also lead to a sudden drop in construction and land prices. Securing a forward loan and then waiting could be a good strategy.
Baufuchs2000 schrieb:
If you read the comments and statements from central bankers today, interest rates are likely to rise sharply and very quickly. We are certainly heading toward mortgage rates of 6-7 percent by the end of the year. No crystal ball needed for that.
Therefore, I would complete the financing immediately. However, a significant increase in interest rates could also lead to rapidly falling construction and land prices. Consider securing a forward loan and then waiting.And how is that supposed to work if the building planning isn’t finished?P
Pinkiponk29 Jun 2022 07:57Baufuchs2000 schrieb:
...Honestly, your forecasts and so on are starting to worry me a bit. Could you, with the same enthusiasm, ;-) also look out for positive aspects regarding house building costs and similar? They must exist as well. That would certainly not only make me happy. 🙂 (Please, this is not directed at you alone (this reminder also applies to myself and others), ;-) let’s avoid political digressions, otherwise this thread might end up being closed, which would be, in my opinion, really a shame.)
J
Julchen739329 Jun 2022 08:28Torti2022 schrieb:
I only just got a chance to read the thread, but at your age, I would look for a bank that allows repayment adjustment down to 1%. You’re still so young that you could, for example, start with a 3-4% repayment rate (sometimes better conditions are available) and then immediately reduce it to 1%. Mathematically, it results in a very long loan term, but so what. By age 65, you would have a very small remaining balance left. That’s better than having to pay high rent in old age—you will have to accept (significantly) higher rent in the medium term anyway if the current house becomes too small for you. Our house bank has not offered a repayment adjustment option or has denied the possibility so far. That would of course resolve our concerns about parental leave and childcare. Do you know banks where this is possible?
Snowy36 schrieb:
And how is that supposed to work if the building planning isn’t finished? Yes, that is exactly our biggest problem. If material prices continue to rise, we can offset that by making compromises on the fittings, but we will not be able to finance a strong interest rate increase. For our loan amount, an interest increase of 1% costs us about €500 (about $540) more per month, and we cannot afford that...
If we knew today that we would get the interest rate from the last discussion with the bank in 4-6 months, when the planning and everything is finalized, then we would decide on the building plot.
W
WilderSueden29 Jun 2022 16:24Snowy36 schrieb:
And how is that supposed to work if the building plans are not finished yet?A building permit (planning permission) is not necessarily required for a loan. However, what you do need is a cost estimate from the general contractor or architect. You don’t even have to own the plot yet, but of course, you will have a repayment obligation for the loan agreement. I had considered this myself because I signed the contract back in January 2021, but the plot was not yet developed or officially transferred to me by the municipality. For the "new KfW funding," this caused some issues at that time.
Julchen7393 schrieb:
Our primary bank has not offered a repayment adjustment option so far, or they have denied the possibility. However, that would obviously resolve our concerns about parental leave and childcare. Do you know of any banks where this is possible?Am I mistaken, or is it always called a repayment adjustment when you can change the installment amount (either up or down)? Recently, we agreed with VR to allow (I think 2 or 3) installment adjustments. That was important to us since our income situation might improve significantly soon, and given the overall situation with the war, etc., it’s better to be safe than sorry. A few years ago, this was also possible with S-Kasse.