Is it permissible to borrow money to build a new house instead of the dilapidated, old house that is unfit for habitation and does not provide privacy, especially since the family cannot afford to buy or rent another house due to the father's low income?

Usury is one of the gravest sins, and a severe warning has been issued concerning it. Allah Almighty says: (O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers. And if you do not, then be informed of a war [against you] from Allah and His Messenger.) The Prophet, peace and blessings be upon him, cursed the one who consumes usury, the one who feeds it, its scribe, and its two witnesses.

Usury is not permissible except in cases of dire necessity, and your need to renovate your house is not one of them. You can search for legitimate alternatives, such as Tawarruq, which involves buying an item on installment and then selling it for cash to obtain money.

If that is not feasible, then be patient and content yourselves with renovating the house. As for the neighbors, they should prevent overlooking your house by building a screen that blocks the view, because overlooking a neighbor's property is a harm to them.