Can I afford to build a house at all and which construction project fits the financial framework? Builders need to clarify these questions in advance. This article provides tips to find out how much house building is realistic. A few rules of thumb will help.
Even with a rare 100% financing for the construction of a house, a minimum amount of equity is always necessary. In any case, at least the ancillary purchase costs for the purchase of the property, the broker’s commission and the property transfer tax of 10-15% of the total price must be paid. But building a house without equity is rare anyway, such models are very expensive and risky due to the high interest burden. Depending on the personal risk profile, banks usually require at least 20% equity. Incidentally, the part of a property that has already been purchased that has already been paid off counts as part of the existing equity.
Many banks raise their interest rate significantly when future builders have little equity available. Since the risk for the bank increases with low equity, there are high interest rate premiums, especially for financing of more than 80% of the total amount. If you still decide to finance with little or no equity, the builders should be able to repay the loan more. So that the remaining debt is not too high in the case of follow-up financing, as much of the loan amount as possible should be repaid as quickly as possible. Otherwise, the monthly installments could rise significantly due to higher interest rates. In general, when interest rates are low, you should always opt for the longest possible term of the fixed interest rate. (You can find out why the term of the fixed interest rate is one of the most important factors for evaluating a financing offer in our article: Evaluating financing offers.) Equity to include
Here is a simple example: If you want to finance a construction project of €400,000 but the bank requires you to have 20% equity, you will only receive a loan of €320,000 and you will have to pay the remaining €80,000 yourself.
Formula: Total Cost x Minimum Percentage = Equity Required
Calculation: 400,000 x 0.20 = 80,000
Also, don’t forget the ancillary construction costs, for which you should budget a flat rate of 10%.
You can find out more about ancillary construction costs under The ancillary construction costs checklist .
The funding rate
All financing includes interest and repayment.
The percentages in which these two quantities are given usually refer to one year. So in one year you pay back a percentage of the borrowed amount on the one hand and a fee for the transfer of the amount of money on the other – this results in an annual financing rate. If you divide this amount by 12, you get the monthly financing rate. This number is probably the quickest way to tell whether financing is within your expectations or not.
Interest and repayment: Interest is the amount that the debtor pays the creditor for making a certain amount available for a limited period of time. Repayment refers to the repayment of debt.
Continuing with the example: If you have agreed 2% interest and 2% repayment per year, this results in a financing rate of 4% per year. With your loan amount of €320,000, this corresponds to an annual rate of €12,800 or a monthly rate of €1,066.
Financing rate to count
Formulas: Loan amount x (interest rate + amortization) = annual financing rate annual financing rate / 12 months = monthly financing rate
Calculation: 320,000 × (0.04 + 0.04) = €12,800 per year 12,800 / 12 = €1,066 per month Important: The monthly additional costs (water, electricity, heating, property tax, etc.) are not yet included in the financing rate, but must be included in the calculation will.
The household bill
In order to check the creditworthiness, each bank prepares a household bill with the borrower. Income and expenses are offset against each other. The bank already calculates the expenses for your future financing rate. If the result of this calculation is positive, there is nothing to be said against a loan. In order to calculate your monthly expenses without analyzing each individual bank statement, banks use flat rates for living expenses. The monthly additional costs such as water, electricity, heating and property tax are included in the household bill. Here, too, the banks expect a flat rate of around €2-2.50/m² of living space. The rule of thumb when it comes to household bills is that if the financing rate is less than 30% of household net income, financing is feasible with most banks.
The household bill to calculate
With the financing amount of €320,000 and a rate of 4% per year, your monthly rate is €1,066. So how high does your monthly net income have to be so that this rate is only 30% of it?
Formula: monthly rate / 0.3 = monthly minimum income (net)
Calculation: 1.066 / 0.3 = 3.553€
Roughly speaking, you should have an income of at least €3,500 so that nothing stands in the way of a loan from the bank.
With these three parameters and the associated rules of thumb, you can find out whether and how the house can be built. Basically, it is more generous to calculate, since unexpected expenses or unforeseen developments can always occur. Construction costs can also be higher than previously planned.
You can read more about the risks associated primarily with inadequate planning in our article on Dangers when building a house.