Especially the last few years show that more and more people have the desire to own their own home. You want to create your own empire, be independent of landlords. But what about the equity? How much should be available for the purchase of a house? How much equity for house purchase should be on the side?
Why do you need equity to buy a house at all??
First of all, it is important to clarify why equity is so important when buying a house. Equity has an important meaning especially for the house purchase and the associated financing. Also especially if there are still additions or alterations to be made to the property. The more of your own money you have, the lower the risk of defaulting on a payment – for both lenders and borrowers. The rule of thumb says the more equity, the better.
Not only the security of all parties is increased by equity, but also provides the borrower usually better conditions in the financing in terms of interest rates. A higher risk of non-payment is paid by most banks through higher interest rates. Possessing equity has other advantages, such as a lower residual debt after the end of the fixed-interest period. This has a positive effect on the follow-up financing. Equity also means for the parties a lower risk in the financing and it reduces the amount of the required loan and the monthly installments.
In principle, equity is not distinguished in the construction and purchase of houses. For both projects, equity is considered advantageous. When examining their own, financial situation often comes up the question of what all counts as equity capital. This is made up of various items, such as savings (stocks, funds, time deposits or overnight money), precious metals such as gold coins or reserves in the bank account. But also subsidies, personal contributions, building savings contract and life insurance belong to the equity capital.
How much equity capital should one have for the house purchase?
Here the ideal case would be of course to answer with – 20 to 30 percent of the total costs. This equity is composed of several parts. Some is needed to pay for the incidental costs of purchase. This includes, for example, the broker's commission, the land transfer tax and the notary's fees. Depending on the state, this is a sum of about 9 to 15 percent of the purchase price. This amount is not financed by the bank.
Equity is the second part that can reduce the amount of credit that must be borrowed from the bank. This part is variable and it is recommended here at least 20 percent of the purchase price. A high equity share in a house financing not only reduces the loan amount, it accrues less debt, the interest rate is therefore more favorable and the residual debt is also lower. This in turn facilitates any follow-up financing that may be required. The contribution of equity capital also noticeably increases the chances of a loan approval for the purchase of the house.
Start without equity for home purchase?
But what now, if no equity is available – is then a house purchase financing at all possible? This question can be answered with yes. But then certain conditions must be met. This includes, for example, an above-average income and a secure job, for example as a civil servant. Another good condition for buying a house without equity is an optimal real estate location. This increases the value of the property and gives the bank greater security. No equity capital means however for the bank a higher risk, which it lets itself pay with the higher interest rates.
A house purchase with full financing always involves a certain risk. If there is a negative change in the borrower, the consequences can be far-reaching and in the worst case lead to the loss of the property. Since straight the banks with a full financing let themselves pay this in the form of interest surcharges expensively, the owner should attach great importance to the selection of the financing partner. Together with a competent partner at the side and a careful preparation, a house purchase financing can be realized also with little or completely without own capital funds, without high risks. So who has a secure income, but does not have the necessary financial reserves, can increase the chance and security of a loan when buying a house without equity capital.
It is important to note that the residential real estate credit guidelines, which have been in force since March 2016, limit the maximum terms of loan agreements. Until now it was possible to finance until retirement age. Today with new financings the loans must be paid off up to the pension entrance, or it is present a high pension income. The banks check the relevant documents for this. Therefore it is worthwhile to begin early with the house purchase.
Collateral is also equity
Anyone planning to finance a house purchase should therefore take a close look at the banks beforehand. Various factors play a role in financing. Here counts for example the height of the loan sum, there are guarantors, it concerns owner-occupied property or is to serve the house purchase as capital investment. What collateral is available (funds, real estate, etc.)?.a.). Each bank can establish in-house regulations. For this reason, it is not possible to make a general statement about which credit institution would be suitable for the purchase of a house. Here it is helpful, if time permits, to obtain offers from several banks for the house purchase financing.
The banks must play along
With a house purchase financing without own capital funds the banks already evaluate possible risks. For example, a valuation of the property is made in advance by the bank. Here it is determined whether the purchase price is reasonable. In the worst case it comes to the fact that the loan can no longer be serviced, so that the bank or the borrower sell the house. So that the banks do not have simple losses, it is determined before granting the loan, what actual sale price the property would yield in case of emergency. In this case, the sales price calculated by the bank is lower than the determined market value due to risk discounts and is referred to as the mortgage lending value.
Important – with the house financing without own capital the bank will demand the high repayment, in order to come as fast as possible again from the risky situation of a sales of the real estate with losses. The faster the loan is repaid, the faster the risk is naturally lowered. Far ahead here are of course those who can bring equity capital with.
The interest level is currently very low. Here the factors do not affect thus particularly strongly. Of course, it is also possible to obtain equity for the purchase of a house. One way to do this would be to take out a loan that is not secured by the property or a personal loan from the family. This would be recognized as equity. It is also possible to have an existing fund savings plan.
Craftsmen can have advantages
If, for example, a craftsman buys a house in need of renovation, he can have the bank credit his own renovation work against the equity in the form of a muscle mortgage.
Buying a home with no equity brings benefits compared to renting. Despite certain risks of home financing without equity, the option is still a viable alternative to renting a home. Even if interest and repayments are higher than for financing with equity, buying a house usually has a positive effect in the long term. When buying a house, paying the loan amount decreases the total burden of housing costs.
That means a loan of 100.000 Euro is paid off over 40 years, after ten years it amounts to only 75.000 euros. The buyer has 25.000 paid off minus the interest. A tenant pays in these ten years about a little less in rent, but has not invested a cent of the money he pays in rent for himself. This means that ultimately buying a house without equity is also worthwhile. Nevertheless, in any case, it should be tried to raise equity capital, so as to keep the amount financed as low as possible and increase the chance of getting a loan.
If repair work is still to be carried out on the house purchase, the equity can be contributed by own contribution. Ideally, it is advisable with the percentage of own contribution does not exceed a value of about 20.000 euros, because it is here that the chance is greater for financing options. It is possible, if the equity is too high, that the bank will deny financing. There are a few banks that see no problem with an amount of equity of fifty percent and more, and would accompany the financing request. Which bank that would be needs to be clarified through financing discussions.
Example calculation how much equity for house purchase
| Purchase price | 500.000 € | 500.000 € |
| Equity | 100.000 € | 0 € |
| Effective interest building loan p.a. | 0,95 % | 1,49 % |
| Monthly payment with 2% amortization | 983,33 € | 1.454,17€ |
| Interest cost after 10 years | 33.956,52 € | 66.250,04 € |
| Residual debt after 10 years | 315.956,92 € | 391.749,64 € |
| Term to full repayment | 40 years and 10 months | 37 years and 3 months |
As you can see, wealth accumulation with real estate is definitely easier with equity capital. Professionals try to use their equity as effectively as possible. See rolling equity.
FAQs – How much equity for house purchase
What does buying a home without equity mean?
Using equity to buy a home is an advantage in many ways. Here, the percentage should be at least twenty. This stake guarantees a good interest rate. Without equity, it increases and the bank sees a higher risk in the financing, as the amount financed is also higher.
Can a house purchase be financed without equity capital?
To fully finance ancillary purchase costs when buying a home, the borrower must have a high and steady income, as well as a secure job. Public officials or public employees have a good chance for full financing.
Cash flow properties help to service the higher rate when rented out.
What services should not be done by yourself, but by a professional?
Heating, plumbing, roofing and electrical – these jobs always belong in the hands of a professional. Here, a small mistake could lead to big damage. The same applies to the listing of the house for a new construction. A layman can not build the walls in own work, if he is not expert in statics.
Can have too much equity for home purchase?
The share of equity should be between 20 and 30 percent. For the remainder of the financing, banks offer more attractive interest rates when equity is used.
What counts as equity for the purchase of a house?
As equity capital counts money of a construction financing, which does not come from the bank, but from own fortune. This includes, for example, savings, cash, investments in building savings contracts or securities. Also an already existing real estate counts with the house purchase as own capital funds. For those who do not have any equity, KFW credit is available. For this purpose, a quote can be obtained.
KfW stands for Kreditanstalt fur Wiederaufbau (Reconstruction Loan Corporation). This credit institution is a development and SME bank. Its task is to grant loans on the basis of funding programs. The KfW is mainly approached by start-ups, private customers or medium-sized companies. These loans are thus granted by the state under certain conditions. Since they were granted, KfW loans have proved their worth, especially for house purchases, structural measures or renovations.
KfW loans do not forget
KfW finances the equity for the purchase of a house, for example, if the equity is not available or an existing equity is not available so quickly or only with disadvantages. Equity financing via the KfW Bank can be used with favorable interest rates. Within the framework of the KfW loans Home Ownership Program 124, the purchase or construction of one's own house is promoted with long-term agreed loans. This includes the cost of the land, for example, and incidental expenses.
The financing bank for the house purchase expects as a rule a certain portion of own capital funds. There is also the so-called hundred percent financing. But for this you must have a first class credit rating, moreover this type of loans are expensive due to the higher interest rates. From the lender's point of view, the inclusion of one's own assets in the financing has a positive effect. This facilitates the servicing of the loan. Defaults or defaults are then less likely to occur.
Are own contribution chargeable?
Own work can be counted as equity in the financing for the purchase of a house. This means that less cash equity must be brought into the construction financing. Certain work done on the house itself can be included as personal contribution. As a rule, up to 15 percent can be credited to the financing sum as personal contribution at the financing bank.
In principle only those work should be furnished as own contribution, which are also possible for one. This includes, for example, painting, wallpapering, laying carpet or laminate or work in the garden area. This includes landscaping or putting up fences. For those who are of the trade, doors can also be renewed or insulation from the inside on the roof can be applied. Depending on the size of the house, this will allow you to save 10.000 euros up to 25.000 euros can be saved.
The personal contributions made must be proven to the bank. As own contribution only the hourly wage is credited, which is saved, if the work is independently accomplished. For this purpose, cost estimates can be requested from a specialized company. Wage and material costs are shown separately on it. In this way, the homebuyer receives information about the amount of work required for individual activities.
Often, however, the amount of work is limited. Here usually applies: Credited own work up to a maximum of 30.000 Euro. Who can prove technical qualifications, with which partial 50 per cent own contribution are possible. The limitations for a non-tradesman has the reason that many works on a house should only be done by a specialist. In this way, construction delays or complications are avoided. Because work that has gone wrong would have to be professionally corrected, which would cost money and time. This would in turn increase the financing.