When it comes to mortgage lending, experts usually agree on one thing: it doesn’t work without equity. But there are also opportunities for prospective buyers without savings.
Top interest rates usually only apply to loans of up to 50 or 60 percent of the purchase price. Those interested in buying or building must contribute the rest from their own resources. If he cannot do this, he pays a premium on the interest rate. Because banks scale their interest rates according to the so-called mortgage lending, the part of the property value that they borrowed.
Nevertheless, equity is a problem for many buyers. Young people in particular have mostly not yet saved any financial reserves that they can use to finance real estate. But they too want to fulfill their own four walls.
Alternative: 100 percent financing
Some financial institutions therefore offer an alternative: 100 percent financing of the purchase price. In this case, customers only have to pay the additional costs of buying property out of their own pockets. For people with a regularly high income, this can be a way of real estate financing.
But there is a catch: If you are flirting with this solution, you should be aware that the property will ultimately be more expensive than with conventional financing, in which most banks require at least a 20 percent share of the loan value. Before getting 100 percent financing, young people should consider carefully whether they want to spend years paying high interest and principal.
Important: The less equity is brought into real estate financing, the higher the interest rate is.
Financing costs increase
There is another disadvantage: the bank includes the risk in the interest rate that in the event of a forced sale – i.e. a forced auction – it will not get the entire loan amount back. Ultimately, this not only makes financing more expensive, it also takes longer.
This means that customers have to expect higher installments, and often cannot repay as much – i.e. pay off the loan amount. This means that they not only bear the financial burden for a longer period of time, but also have worse cards when it comes to follow-up financing because there is still more debt to be paid.
Important: The higher the loan-to-value ratio, the more critically the financing should be checked.
Interest rate risk increases with a longer term
If the interest rate level has also risen in the meantime, the difference to financing with more equity is all the clearer. This means that in the worst case, the residual debt must be financed at a higher interest rate.
However, it also depends on the amount of credit required. With a cheap property for 120,000 euros, for example in a rural area, 100 percent financing with a good income is more feasible than with a 400,000 euro property in the big city. Because then the borrowers can repay the loan faster.
Long interest rates are advisable
Against the background of low interest rates, long fixed interest rates of at least 15 years are helpful for 100 percent financing. But builders should consider: Especially in low interest rates, borrowers should pay off as much and as quickly as possible. Then you will finish paying off faster.
With or without equity – when it comes to home finance, it always depends on the individual case. If no equity is brought in, the long-term income situation is essential. In addition to the individual calculations, builders should make sure that they can make adjustments to their loan agreement. This also includes the possibility of an annual special repayment in order to pay off the loan amount more quickly.