What equity is important for and what it includes
When you research construction financing, you can’t get past one term: equity capital. Hardly any term is so ubiquitous. How much equity is important when buying a home? And what exactly is this? In this article, our expert Jens Marschalek explains everything you need to know – whether you want to build or buy a home.
We answer these questions in this article on equity when buying an apartment or house:
You have more questions about your property?
Jens Marschalek and our other experts have the answers.
What is equity?
Let’s define it very clearly and strictly, equity is exclusively Your current movable capital. Money you have in the bank and immediately Can use for the construction financing. So no equity is a time deposit that is not due for six months. Or fixed-interest securities in a securities account that will not mature for several months.
Savings banks and banks are thinking this term a little further. In advisory meetings, we talk to customers about potential equity, i.e. capital that is available at the start of construction financing without any ifs and buts.
This is (potential) equity in the home purchase:
- A Building savings contract, if you can dispose of the saved amount at the beginning of construction financing.
- A Time deposit account, if at the beginning of the construction financing the money is paid out to you.
- The balance on Savings accounts.
- A Life insurance, which is "due" at the time of the construction financing and then comes to the disbursement.
- Shares and other securities that you can and want to sell immediately.
- All tangible valuables in your possession, Which you can turn into money in a timely manner and – above all – want. These can be gold bars, paintings, jewelry or even a classic car.
Attention: Especially if the price and the calculated value of a property differ greatly, you should talk to your bank about the subject of substitute securities. The difference between an estimated value and the price you are willing to pay may be important for construction financing.
"Construction money will remain favorable"
How high are the interest rates? What are the forecasts for the future? Who plays with the thought to acquire a real estate, deals sooner or later with the building interest, also called mortgage rates. The amount and tendency decide not only on the time of the conclusion of the loan, but also on whether the interest rate for the loan should be fixed for ten years or perhaps even longer.
How is it with own handicraft achievements or private building aids – is not equity capital?
Indirectly true. Because the own contribution (paint, floor lay, and so on) lowers the craftsman wage costs – and thus the building costs. How to improve the ratio of contributed equity to the loan amount. If you do not bring in any real equity for the construction or renovation, you can lower the loan amount through personal contributions.
A classic misconception: Own contributions reduce the total construction costs – that is true. As original own contribution however only the work counts. The material is usually financed with a construction financing, for example, the tiles. The working hours of the builder or the construction workers are not valued with an hourly rate and do not result in an amount in euros at the end, so they are not added to the value of the property.
The so-called muscle mortgage as equity when buying a house, however, carries risks:
- You must plausibly prove how much and what you do yourself.
- Many professionals underestimate the time required.
- By own contributions the building time can extend – depending upon speed, in which you can work or want to work.
- Own contributions cancel the warranty for certain stages of construction.
- Many builders overestimate their own craftsmanship skills.
- Help from friends and relatives may not be as reliable as originally planned.
- A possible "wage replacement" for building helpers you must raise from own means.
- Helpers from friends, acquaintances or family must be insured.
How much equity capital do I need to buy an apartment or a house??
There is no binding rule for this. A minimum required equity capital does not exist. Our experts consider each "purchase wish" individually. As a rule of thumb generally applies: For the most part, it is enough if you pay the incidental costs of buying a house from your own funds. Incidental purchase costs are not included in the purchase price of the apartment or house and are therefore not part of the construction financing.
If you do not bring money for the purchase additional costs, you can finance these in individual cases over a further credit, which is detached from the construction financing. A prerequisite for this is that you have a good and regular income and at the end of each month of it is still enough money left – your monthly balance is thus clearly positive.
100% financing of the property is no longer uncommon today.
Buying a house without equity – these are the requirements