Construction financing little equity – high interest rates

Banks charge high premiums for construction financing with little or no equity. Those who put in a little more money often save many thousands of euros in interest.

  1. Overview

Own capital is becoming increasingly scarce

The risen real estate prices become for house and dwelling buyers ever more the problem. Younger people in particular do not have enough capital to pay 20 percent of the purchase price plus all ancillary costs – a procedure that is still considered the standard for solid financing today. For many prospective buyers, the entire equity capital is already used for property acquisition tax, real estate agent and notary.

Because of the low interest rates, however, financing up to 100 percent of the purchase price is possible today. Most banks play along. Borrowers take a higher risk with it however and are asked strongly to the cash.

Our advice

High interest surcharges for full financing

The lower the equity, the higher the interest rate that banks charge for their loans. If you finance more than 90 percent of the purchase price on credit, many institutions charge 0.5 to more than 1 percentage point higher interest than for 80 percent financing. This shows our table interest surcharges. In addition, a monthly installment of up to 60 percent is due.

High housing costs when buying in large cities

For buyers with little equity, especially in large cities, this means that they often have to spend several hundred euros more per month on housing after the purchase than for a comparable rental apartment. Not everyone can afford this.

The more scarce the own capital, the more important a good and safe income becomes. This should be enough to repay at least 3 percent of the loan per year, in addition to the interest. In this way, the missing equity capital is quickly made up for by repayment.

Buying a house without your own capital is risky

Own capital is an important security buffer, which protects against over-indebtedness in the case of a distress sale. Financing fully on credit is therefore a delicate matter even in times of low interest rates. If the real estate must be sold after some years again, it can happen with scarce own capital fast that the sales proceeds are not sufficient for the debt repayment. There is a high risk with the house purchase with few own capital funds.

Independent. Objective. Incorruptible.

Fixing interest rates for a long time

Particularly important with a high credit financing is a long interest commitment. The interest rates for real estate loans will not remain as low as they are today forever. When the fixed interest rate expires after five or ten years, the loan debt is usually still so high that the monthly installments would hardly be affordable after a significant interest rate increase.

Therefore, the interest rate should be fixed at least until half of the loan amount has been repaid. This usually requires an interest rate lock-in of 15 or even 20 years.

Interest rates as for an overdraft facility

Many real estate buyers are not even aware that a lack of equity will cost them dearly. Our calculations show: On the loan portion that exceeds 90 percent of the purchase price, you sometimes pay interest as if you had an overdraft facility.

Example. Here is a simplified calculation for the purchase of a 400,000 euro property in Berlin: Commerzbank charges a debit interest rate of 1.41 percent for a loan of 360,000 euros – 90 percent of the purchase price – with a fixed interest rate of 15 years (as of 12 December 2009). October 2021). That is 5 076 euros interest in the first year. For a 380,000-euro loan – equivalent to 95 percent of the purchase price – the interest rate rises to 1.85 percent and the annual interest to 7,030 euros. For only 20 000 euro more credit the bank requires full 1 954 euro more interest in the year. This corresponds to an interest rate of 9.77 percent.

That’s how expensive the last 20,000 euros are

The buyer of a 400,000 euro apartment takes out a loan with a 15-year fixed interest rate. The graph shows the interest rates that apply to the last 20,000 euros. Example: If they finance 100 percent of the purchase price, they pay ING 7.77 percent on the loan portion of 20,000 euros that exceeds 95 percent.

Calculated on the basis of the interest rates for the total loan in the table interest surcharges. Status: 12. October 2021

Interest rate jumps significantly upward

Banks calculate their interest surcharges very differently. This applies not only to the amount of the surcharges, but also to the number and the distance of the steps, from which the credit interest rate rises. But a tendency is clear: As soon as the credit exceeds 90 per cent of the purchase price, the interest rate jumps with 11 of 13 banks in our sample clearly upward. This shows our table interest surcharges. Six of these banks demand an additional surcharge if the loan exceeds 95 percent of the purchase price.

In most cases, therefore, it is worth mobilizing at least enough equity to bring the loan down to the 90 or 95 percent mark. Which possibilities there are for it, the overview of possible sources of money shows.

Saving through more equity

The chart below shows the enormous savings potential. In the example, the borrower invests 10,000 euros more of his own capital than initially planned, thereby reducing the loan amount to 90 percent of the purchase price. Result: At 8 out of 13 banks, the interest savings during the 15-year fixed-rate period amount to 12,300 to 31,800 euros. In percent that means: The 10,000 euro own capital bring 5.5 to 10.0 per cent net yield in the year – absolutely surely, tax-free and long 15 years.

This is how much an additional 10,000 euros of equity brings in

A buyer pays 400 000 for his property. The chart shows how much interest he saves if he takes out a loan for only 360,000 instead of 370,000 euros by using 10,000 euros more of his own capital. Example: The additional equity capital brings an interest saving of 31,819 euros at Allianz until the end of the 15-year fixed interest rate period. This corresponds to a yield of 10 percent.

Calculation based on interest rate data of the banks on the Internet (table interest surcharges). Status: 12. October 2021

Combination with K loan

For real estate buyers with little own capital it can be worthwhile to finance a portion up to 100,000 euro with a credit from the residential property program of the national K bank. Anyone can get this loan for the construction or purchase of an owner-occupied property.

For an 80 percent financing, the K loan is currently not particularly favorable. But this changes when customers need 90 to 100 percent of the purchase price. Then the bank loan usually becomes significantly more expensive, but the K interest rate remains the same. Full financing is therefore often cheaper with a K loan than without. Sometimes banks offer the own loan in combination with a K loan at a lower interest rate.

However, the K loan is only available with a fixed interest rate for a maximum of ten years. To limit the risk of interest rate increases, it should only be combined with a bank loan with a significantly longer fixed interest rate.

Calculator. How much interest you save with a little more equity, our marginal interest calculator determines.

Current interest rates. Monthly updated interest rates for real estate loans that cover 60, 80 and 90 percent of the purchase price (with 10, 15 and 20 years of fixed interest rates) can be found in our mortgage interest rate comparison.

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