Especially the last years show that more and more people have the desire to own their own property. You want to create their own empire, be independent of landlords. But what about the equity capital? How much should be available for the purchase of a house? How much equity for home purchase should be on the side?
Why do you need equity capital to buy a house in the first place??
For now, the question would be why equity is so important in a home purchase. Equity has an important meaning especially for buying a house and the related financing. Also especially if additions or alterations are still 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 sides, lender and borrower. 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 default most banks make you pay through higher interest rates. Owning equity has other advantages, such as a lower residual debt after the end of the fixed-interest period. This has a positive effect on follow-up financing. Equity also means less risk for the parties in financing and it reduces the amount of the loan needed as well as the monthly payments.
In principle, equity in the construction and purchase of a house is not distinguished. For both projects, equity capital is considered advantageous. When examining one's own, financial situation, the question often comes up as to what all counts toward equity. This is composed of various items, such as savings (stocks, funds, time deposits or overnight deposits), precious metals such as gold coins or reserves in the bank account. But equity also includes subsidies, personal contributions, building savings contracts and life insurance policies.
How much equity should you have to buy a house?
Here, of course, the ideal case would be to answer with – 20 to 30 percent of the total cost. This equity is composed of several parts. A portion is needed to pay for incidental purchase costs. These include, 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 does not only reduce the loan sum, it results in less debts, the interest rate becomes thus more favorable and the remaining debt turns out likewise lower. This in turn facilitates any follow-up financing that may be required. The contribution of equity also noticeably increases the chances of a loan approval for the purchase of the house.
Start without equity capital for the house purchase?
But what if there is no equity capital – is a house purchase financing possible at all?? This question can be answered with yes. Then however certain conditions must be fulfilled. 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 own capital means however for the bank a higher risk, which it lets pay itself with the higher interest rates.
A house purchase with full financing always carries 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 these in the form of interest surcharges let themselves pay, 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 if you have a secure income, but do not have the necessary financial reserves, you 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 effect since march 2016, limit the maximum terms of loan agreements. Until now it was possible to finance until retirement age. Today, for new financing, the loans must be paid off by retirement, or there is a high pension income available. The banks check the relevant documents for this. Consequently, it is worthwhile to start early with the house purchase.
Collateral is also equity
So if you are planning to finance the purchase of a house, you should take a closer look at the banks in advance. Different factors play a role in the financing. Here counts, for example, the amount of the loan, there are guarantors, it is about owner-occupied property or should the house purchase as a capital investment serve. Which securities are present (fund, real estate u.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 have to 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, the loan can no longer be serviced, so that the bank or the borrower sells the house. To ensure that the banks do not incur simple losses, the actual sale price of the property in an emergency is determined before the loan is granted. In this case, the sales price calculated by the bank is lower than the determined market value due to risk discounts and is known 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 reduced. Far in front are here naturally those, which can bring along own capital funds.
Interest rates are very low at the moment. Here the factors do not affect thus particularly strongly. Of course, it is also possible to obtain equity capital for the purchase of a house. One possibility would be to take out a loan that is not secured by the property or a private loan from the family. This would be recognized as equity. An existing fund savings plan is also possible.
Craftsmen can have advantages
If for example a craftsman should buy a house in need of renovation, this can let count its own contributions with the bank with the renovation on the own capital funds in the form of a muscle mortgage.
Buying a house without equity brings advantages compared to renting. Despite certain risks of home financing without equity, the option is still a viable alternative to renting an apartment. Even if interest and repayment are higher, than with a financing with own capital funds, the house purchase affects in the long term usually positively. When buying a house, the total burden of housing costs decreases due to the payment of the loan amounts.
This means a loan of 100.000 euro is paid off over 40 years, after ten years it amounts to only 75.000 euro. The buyer has 25.000 euros 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 a house purchase without equity is also worthwhile. Nevertheless, it should be tried in any case to raise equity, so as to keep the financing amount as low as possible and increase the chance of a loan.
If still repair work is to be accomplished with the house purchase, the own capital funds can be brought in by own contribution. Ideally, it is advisable not to exceed a value of about 20.000 euros to come, because just here the chance is greater for financing options. It is possible, if the equity is too high, that the bank refuses the 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, must be clarified through financing discussions.
mattcastruccimazda.com calculation how much own capital funds for house purchase
|purchase price||500.000 €||500.000 €|
|equity||100.000 €||0 €|
|effective interest rate building loan p.A.||0,95 %||1,49 %|
|monthly installment with 2% repayment||983,33 €||1.454,17€|
|interest costs 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, the asset building 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 a house purchase without equity mean?
To use equity when buying a house is an advantage in many respects. Here the percentage should be at least twenty. This input guarantees a good interest rate. Without equity capital this increases and the bank sees a higher risk in the financing, since the financing sum is also higher.
Can a house purchase without equity be financed?
In order to fully finance the purchase of a house, the borrower must have a high and stable income and a secure job. Civil servants or employees in the public sector have good chances for a full financing.
Cash flow properties help, if they are rented, to serve the higher rate.
Which services should not be carried out by the owner, but by a professional?
Heating, water, roof and electrics – these works always belong in the hands of a professional. Here a small mistake could lead to great damage. The same applies to the installation of the house in the case of new construction. A layman cannot build the walls himself if he is not a specialist in structural engineering.
Can have too much equity for home purchase?
The share of equity should be between 20 and 30 percent. For the remaining financing banks offer more attractive interest rates when using equity capital.
What counts as equity capital 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 have no equity capital, KFW credit is offered. For this purpose an offer 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 development programs. Mainly turn to the kfw business start-ups, private customers or medium-sized companies. These credits are granted thus on the part of the state to certain conditions. Since they were granted, kfw loans have proved their worth above all for house purchases, structural measures or renovations.
Do not forget kfw credits
The kfw finances the equity for the house purchase, if, for example, the equity is not available or an existing equity is not available so quickly or only with disadvantages. Equity financing through 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 costs of the property, for example, and ancillary costs.
The financing bank for the house purchase usually expects a certain proportion of equity capital. There is also the so-called hundred percent financing. For this, however, a first-class creditworthiness must be present, in addition, this kind of credits are expensive due to the higher interest rates. From the lender's point of view, the inclusion of own assets in the financing has a positive effect. This facilitates the servicing of the loan. Defaults or delinquencies are then less likely to occur.
Are own contribution chargeable?
Own contribution can be counted as equity capital when financing the purchase of a house. This means that less cash equity must be contributed to the construction loan. Certain work done on the house itself can be included as personal contribution. As a rule, up to 15 percent of the financing amount can be credited to the financing bank as personal contribution.
In principle, only those works should be carried out by the owner that are also possible for him or her. This includes, for example, painting, wallpapering, laying carpet or laminate or work in the garden area. This includes the garden design or the setting of fences. For those who are experts, doors can be renewed or insulation can be applied to the roof from the inside. Depending on the size of the house can be financed in this way 10.000 euro up to 25.Save 000 euros.
The personal contributions made must be proven to the bank. Only the hourly wage saved when the work is done independently is counted as equity. For this you can ask for estimates from a professional company. On it, labor and material costs are shown separately. In this way, the homebuyer receives information about the amount of work required for individual activities.
However, the amount of the activities is often limited. Here usually applies: credited own work up to a maximum of 30.000 euros. If you can prove professional qualifications, sometimes 50 percent personal contribution is possible. The reason for the limitations for a non-handyman is that a lot of work on a house should only be done by a professional. This avoids construction delays or complications. Because work that goes wrong would have to be professionally corrected, which would cost money and time. This would again increase funding.