Whether it is about the equity of a company or the equity of a mortgage: in general, the more the better. For a company, a lot of equity means a solid foundation, with a home loan it increases the creditworthiness and lowers the monthly interest burden. Although construction financing without equity is now also available, the equity ratio for solid financing is at least 20 percent of the purchase price.
- As a rule of thumb: 20 percent of the construction costs plus the entire ancillary costs should be available as equity as defined on digopaul.
- The more equity the builders bring in, the better the interest rate they get.
- Equity must be available when it is needed. If, for example, the home loan and savings contract is not yet ready for allocation, builders have to provide interim financing. Then the additional costs for the bridging loan have to be planned in from the beginning.
Equity and Lending Value
The mortgage lending value represents the amount of security that the bank sees in the property. In the rarest of cases, the mortgage lending value exceeds the purchase price, as a rule it is marginally the other way around. Equity and mortgage lending value are closely linked in mortgage lending.
Calculate equity: example
The purchase price of a property is 300,000 euros and is identical to the mortgage lending value. The bank can finance up to 80 percent of the loan value – assuming the purchaser’s monthly liquidity. In this case, this sum is 240,000 euros.
In addition to the purchase price of 300,000 euros, there are ten percent incidental acquisition costs, 30,000 euros. The buyer therefore needs equity of 90,000 euros.
If he has this amount, nothing stands in the way of financing. However, if his equity is only 60,000 euros, there is a shortfall of 30,000 euros. Financing this through an installment loan becomes difficult because the mortgage loan on the property is registered with the Schufa. The alternative would be to look for a cheaper property.
What counts as equity?
In connection with home financing, equity does not only include cash or marketable securities. The framework is much broader. But first and foremost, real estate buyers naturally access what they have saved. The following are suitable as equity capital for real estate financing:
- Balances on current and savings accounts
- Daily and time deposits that are available at short notice
- Mutual fund shares and stocks that you can sell on short notice
- Savings bonds or long-term fixed-term deposits that must be financed until the due date after the contract is terminated
- Precious metal reserves
Selling securities only makes sense if the interest on bonds is lower than the interest on the loan. If the bonds are still from a high interest rate phase and the loan is closed in a low interest rate phase, the income from the fixed-interest paper can bear part of the interest burden.
Personal contribution (muscle mortgage)
If the loan amount for the purchase of a property also includes renovation or refurbishment work, the banks recognize personal contribution , popularly known as a muscle mortgage, as a substitute for equity. The hourly wages saved by a craftsman are used as the basis for calculation. The same applies, of course, to the help of friends or relatives. However, it must be conclusively proven that the people are also proficient in the respective trade. Evidence can be critical, especially in the field of electrics.
A life or pension insurance does not have to be sold in order to be added to the equity: The surrender value can also increase the scope of the collateral in the context of an assignment .
The employer loan
An employer loan is not a security, but a loan which, when financed, has the character of equity. For tax reasons, however, it is important that a correct loan agreement is concluded between the employee and the employer. This must include the loan amount, the interest and the repayment installment as well as the term. The interest rate may not fall below a certain limit, depending on the average Pfandbrief interest rate. Otherwise, the loan is a taxable pecuniary benefit.
The relative loan
With this variant of raising own funds, the bank does not even have to be informed as long as the monthly rate can be serviced without problems. The design is completely individual and can be carried out without a contract or, if desired, also contractually and confirmed by the notary.
If it is already planned that parents or grandparents would like to bequeath money or a fund, now is the right time to initiate this in order to increase the equity. In addition, inheritance tax can be avoided in this way , provided that the gift does not exceed the tax exemption. Children of the donor have a gift tax exemption of 500,000 euros, grandchildren of 200,000 euros. This allowance can be used again every ten years.
Home savings balance
Existing home loan savings may of course not be missing from the list of equity substitutes. A home loan and savings contract that is in the process of being saved does not have to be terminated in order to use the credit as equity. In this case, too, an assignment to the bank is completely sufficient. If the home loan and savings agreement is not yet ready for allocation, bridging finance until allocation can be worthwhile.