Note: The following article is for general guidance only. For binding advice, we strongly recommend that you consult an expert. We will be happy to put you in touch with the right experts in our region.
Equity when buying a property: how important is it really?
The Purchase of a propertyWhether for personal use or as an investment, buying a home is one of the biggest financial decisions in many people's lives. Equity plays a decisive role here: it reduces the amount of credit required, lowers the monthly interest and repayment instalments and ensures better conditions with the bank, as the risk for the lender is reduced.
A high equity ratio signals financial stability and reliability, which significantly increases the chances of a successful loan approval. At the same time, a solid equity ratio creates a long-term sustainable basis for property financing and offers more financial security and flexibility.
What is equity anyway?
- Savings and call money accounts
- Building society contracts
- Shares and securities
- Life insurance policies (surrender values)
- Gifts or inheritances
- Existing property assets
How high should the equity be?
The equity required when buying a property depends on various factors, including the purchase price of the property and the ancillary purchase costs incurred. As a rule, buyers should have at least 10 to 20 % of the purchase price as equity in order to create a solid basis for financing. In addition, the Incidental purchase costssuch as land transfer tax, notary and land registry costs and, if applicable, the estate agent's commission, which may include 8 to 13.5 % of the purchase price can make up. Overall, the equity should therefore be sufficient to cover part of the purchase price as well as the ancillary costs.
Use our budget calculator to analyse your financial possibilities and obtain a realistic assessment of your financing options.
Are you familiar with the state federal programmes?
If equity is tight, government subsidy programmes or grants can help. The KfW Bank for example, offers low-interest loans or grants for energy-efficient renovations and the construction or purchase of residential property. Also Regional development banks offer support that is often granted regardless of equity. A discussion with a financial advisor can help to identify suitable programmes.
Your questions briefly summarised:
Can personal contributions be included in the equity when buying a house in need of renovation?
Particularly when buying an old house in need of renovation, personal contributions, often referred to as a "muscle mortgage", can be included in the financing. Banks sometimes recognise manual work such as renovations or refurbishments as a substitute for equity capital, provided that the personal contribution is realistically calculated and documented. This not only reduces the overall costs, but can also noticeably increase the equity ratio. Overall, a solid equity share in combination with recognised personal contributions creates a long-term sustainable basis for property financing and offers additional financial security and flexibility.
Who checks whether my equity details are correct and how?
As part of the credit assessment, the bank or financing credit institution will check how much equity you can contribute. Not only the amount plays a role here, but also the origin and availability of the capital. You must provide appropriate evidence, such as bank statements, custody account balances or building society savings contracts.
Important: Funds that are not immediately available or are tied up for a long time may not be counted as equity.
What happens if there is less equity?
If your equity is below the recommended limit, you face the following challenges:
- Higher interest ratesBanks compensate for the increased risk of low equity with higher interest rates. This can make your financing more expensive in the long term.
- Higher monthly chargeThe larger loan amount increases your monthly instalments. This can limit your financial flexibility.
- Additional collateralThe bank may require additional collateral, such as a guarantee or the pledging of other assets.
- Refusal of creditIn extreme cases, the bank could refuse financing if it considers the risk to be too high and your ability to repay is not guaranteed.
What options are there if I have too little equity?
If your equity is not sufficient, you have the following options:
- Full financingSome banks offer loans that cover the entire purchase price. However, please note that these loans are significantly more expensive and the requirements for your credit rating are high.
- Subordinated loan or personal loanYou could raise additional capital with a second loan. However, you should keep an eye on the interest charge.
- Personal contribution ("muscle mortgage"), If you are a handyman, you can save money on renovation or construction work by doing it yourself. Some banks recognise this "muscle mortgage" as a substitute for equity.
- Support from family Gifts, early inheritances or low-interest loans from the family can serve as a substitute for equity.
Property valuation for more security
A realistic property valuation by experts gives you certainty about the actual value of the property. Unforeseen costs can arise, especially in the case of houses in need of renovation. A professional valuation helps you to plan the financing better and shows the bank that you have calculated carefully.
What is financed from equity?
Equity is used for several important areas when buying a property. Firstly, it covers the ancillary purchase costs that cannot usually be financed via a loan. These include land transfer tax, notary and land registry costs and estate agent commission. Another part of the equity goes directly towards paying the purchase price.
In addition, equity is often used for modernisation and renovation costs, especially for older properties, whereby personal contributions ("muscle mortgage") are sometimes recognised by banks as a substitute. It is also advisable to retain a portion of the equity as a security reserve to cushion unforeseen costs such as repairs, operating costs or loss of income. In this way, equity not only contributes to the financing of the property, but also creates financial stability and security for long-term sustainable financing.
Conclusion: Equity creates security
Equity is a decisive factor when buying a property, as it not only makes financing easier, but also strengthens your negotiating position with the bank. Our many years of experience in the property business show that well-planned financing is the key to success. That is why we accompany you through the entire purchase process with commitment and foresight - from the initial analysis of your options to the successful handover.
Our comprehensive range of services and in-depth knowledge of the market will help you find the perfect property and achieve your goals with confidence. Put your trust in our expertise to make your dream of owning your own home a reality.
