Snakes and stepladders

We got some good and bad news from the bank today. The good news is that the bank has approved the valuation on our house and we no longer are on the hook to immediately pay back a veritable crapload of euros for the renovation portion of our house loan. That is great, but it is also linked to the bad news.

The loans manager we were dealing with has left the bank and we discovered there were some inconsistencies and misinterpretations of some kind, as we were never meant to pay back the loan if we didn't reach the evaluation. We found out a week ago that if the evaluation didn't reach the required amount, we would have to find the entire secondary loan amount by June 21st, which would have been impossible.

The deal we had agreed to, was that if we didn't reach the evaluation required, we would be stuck with a higher interest rate on the renovation portion of the loan and if we did reach the number needed, that part of the loan would be changed to the same terms as our main loan - which also has a 10 year interest collar on it. It seems that this wasn't conveyed into the system and we are going to have to have some more negotiations. For now though, it doesn't matter because the interest rates are so low that it is almost free. But I suspect, that isn't going to be the case for the next 8.5 years of the collar and beyond for the length of the loan.

The reason we had to do it this way in the first place, is that in quite new Finnish law, they are able to loan a maximum of 85% of the value of the house in total, even if it requires renovation. So, let's say the value of a house is 200,000 and requires 100,000 in renovation work, the maximum the bank can loan is 170,000. This means that to buy the house, it will require a deposit of 30,000 and the 100,000 for renovation would have to come out of pocket. There aren't many people who have 100,000 in cash available, so old houses have been dropping in value, snapped up by developers and turned into overpriced apartments and flats.

While we could have easily got a loan for more than the house and renovation combined, they would only give us that if we bought one of the overpriced apartments or move-in ready places. This is snakey, but kind of makes sense in the way that they are protected for resale if we become unfit and can't pay - but what it means is that unless already having the cash to renovate, it is pretty much impossible to put sweat equity into a house through renovation. It also creates a "trapped" market for the developers to sell into, one where the per square meter costs are very high and the owners don't even own the land, plus have to pay maintenance fees.

Conveniently, the banks are also able to push much larger loans to homebuyers, especially the young who have very little savings available to do any renovations at all, but with so much "free" debt, they can get into more expensive homes. This has a long term effect too, as because less people can put in sweat equity, at some point when the house is sold, they will likely have less gain from it (if any once adjusted for inflation and maintenance), meaning that the loan they will need for their next home will be larger than someone's who was able to get some additional capital out of selling their previous place. This can be very significant over time and, it also has ramifications for the development of generational wealth, with those without, falling even further behind those with.

The risk for us was very low when we first got into this and with 11 months to get completed, things seemed pretty good. But it was just prior to Corona becoing a thing and the subsequent restrictions. There was no way to predict what was actually going to happen once it started, as everything changed, including getting tradespeople for key work and then when we did, often having them cancel (or we having to cancel) due to someone having a runny nose. We ended up getting an extension for 5 months, but by then, we were so far behind schedule because of Corona factors like material and fittings shortages, we were unlikely to make the cut off.

We are still not finished by a longshot, but we are at least at a stage that what we have done so far has been enough for the approval and now, we can start looking at the terms of the loans and what was originally agreed. Though at the end of the day, it isn't such a big drama as the renovation portion of the loan is only 20% of the total value, as what we did was pay the minimum deposit we could (15%) for the home loan and held back the left over profits from selling our apartment, to push into the renovation, as well as all disposable income over the last 1+ years.

Of course, things would have been easier if we had done what I originally suggested to my wife, which was take 10% of the loan money and BTFD back in March 2020, but she wouldn't agree to that. If we had done that and sold at the top, 40% of the total loan amounts would have been covered. Yet, it was one of those things we both needed to agree upon and she is less risk-seeking than myself.

Houses are not very good investments, but they tend to be "okay" at retaining value, and since people need a place to live anyway, it is not a bad deal. Interestingly, because the current interest rates are so low, we are paying about 30% less for the mortgage than we would pay for a smallish rental apartment. And if we were to rent out our house now, we could probably get about double the mortgage, as houses of this size for rent are becoming very scarce. Ironically, because so many of them have been sold cheap, bulldozed and turned into small and overpriced apartments, as no one can get the money for renovation.

Now, for the same price as moving into a duplex on a small piece of rented land, we have a large house on land we own, with a garden and a loan that is 25% less than it would have been if we had done what the bank wanted us to do. While we still have a lot of finishing renovation to do and hopefully we will get a lot done in the next couple weeks so that summer is more enjoyable, at least we don't have the ticking loan bomb to contend with now. It has been a pretty busy and financially tight year to get to this stage, but hopefully in the next few years we will be in a better position for it and down the track, our daughter will benefit from our stress today.

I just have to find the rest of the money needed to do what's left.

Taraz [ Gen1: Hive ]