Buying a house without equity

Zuletzt aktualisiert am 03.05.2022

Buying a property without equity: Not risky, but intelligent. The leverage of debt capital in an investment property ensures significantly higher returns. For people who want to own their own home, the use of debt capital is often the only way to own their own property.
No matter what the motive for using debt capital is, there are some prerequisites and risks to consider. We explain to you what is important when taking out a loan without equity capital.

Getting a loan without equity

In principle, the following applies: the higher the equity investment, the better (=lower) the interest rate for the financing.
At the same time, the following applies to investors: the lower the equity investment (and consequently the higher the debt investment), the better the return on the equity invested. The principle: Other People's Money. Putting other people's money - in this case banks - to work for you.
The situation is different for a loan to buy a house without equity capital: a lower interest rate is important, the "return" on the home is secondary. Thus, home buyers should maximise the use of equity to push down interest costs.

What exactly is equity capital?

Equity is your own financial resources that you have at your disposal. In simple terms, it is the money that you have saved, i.e. that is in your current account or call money account or in other investments.

Private individuals often first come into contact with the concept of equity in the course of buying a house or flat.

Normally, a property is purchased partly from equity and partly from borrowed capital. In most cases, a corresponding loan is taken out with a bank for the outside capital. The amount of this possible loan depends on the personal, but also the general current economic situation.

The use of debt capital offers the great advantage that less or no equity capital is needed. The personal reserves can then be used and invested elsewhere, e.g. several income properties could be bought or invested in other types of investment. In addition, the use of debt capital automatically increases the return on equity on the property.

In fact, it is no longer unusual to buy a property without any equity at all. This is referred to as 100 per cent financing (if only the ancillary purchase costs are contributed as equity) or 110 per cent financing (if even the ancillary purchase costs are financed in full).

Return on property without equity

To illustrate, let's look at three examples with different financing and the respective return:

The property being purchased has a value of 250,000 euros. The annual rental income is 10,200 euros.

Example 1: The property is purchased with 100% equity. In this example, interest payments are omitted. The return is calculated by dividing the rental income by the purchase sum. Thus, in this example, the rental yield is 4.1%.

Equity capital employed	Return on equity
250.000€	4,1%

Example 2: The same property is financed with 50% equity, i.e. 125,000 euros. We assume an interest rate of 1.5%. The return on own capital doubles in this case and is now around 8.15%.

Equity capital employed	Return on equity
125.000€	8,2%

Example 3: The property is fully financed and only the ancillary purchase costs are paid by the buyer. The amount of incidental purchase costs varies from federal state to federal state. In general, it can be assumed to be between 10 and 15% of the purchase price. In our example we calculate 13% (32,500 euros). The return on equity is approximately 31.3%.

Equity capital employed	Return on equity
32.500€	31,3%

Diese Beispiele zeigen recht deutlich, wie einfach die zu erwartende Rendite durch die Höhe des eingesetzten Eigenkapitals bestimmt werden kann. Übliche Verteilungen von Eigenkapital und Fremdkapital sind:

80% FK/20% + ancillary purchase costs as EK
100% FK/ ancillary purchase costs as EK
110% FC/ 0% EC

Buying real estate: How much equity is needed?

Construction financing without equity is certainly possible, but it depends on personal circumstances. Among other things, banks check the income situation. For 100% financing (the purchase price is financed 100%, only the ancillary purchase costs are to be paid from equity), a good and secure income is necessary, among other things. Therefore, the amount of financing through borrowed capital cannot be chosen by the buyer.

In the previous paragraph we already mentioned possible variants of the distribution of equity and debt capital. At this point we will take a closer look at 100% and 110% financing:

Owning something that cost you nothing sounds tempting. But this form of financing should be well considered, as it also carries various risks.

The 110% variant is even more "favourable". In this case, the property is fully financed without any equity. The ancillary purchase costs are also covered by the main loan or a personal loan.

Kaufnebenkosten fallen bei jedem Immobilienkauf an. Sie setzen sich aus den Notar- und Grundbuchkosten sowie der Grunderwerbsteuer zusammen. Sollte ein Makler am Kauf beteiligt sein, werden diese Kosten ebenfalls hinzugezählt. Die Grunderwerbsteuer ist Ländersache und fällt von Bundesland zu Bundesland anders aus. Sie bewegt sich im Rahmen von 3,5 bis 6,5 Prozent.

Buying property without equity makes sense

Whether buying a property without equity makes sense depends largely on the form of use.

Financing a home without equity carries a higher risk than buying a property to rent out without equity:

When buying a house without equity, there is no rental income. The bank loan is therefore very expensive here. If you get into a financial bottleneck, it can be difficult to make the monthly repayments and interest payments. In this respect, financing without equity only makes sense here if there is a lucrative opportunity to invest the money alternatively with a high return.

The situation is completely different if you plan to rent out the property. In this case, the tenant pays off the loan for you (at least for the most part). For this variant to work optimally, the rental income must cover the interest and repayment as much as possible. In this way, you can build up assets in the long term without having to raise much (or any) capital yourself.

Second property without equity

After the first property has been purchased, many people think about adding a second property to their portfolio without using equity. Acquiring this second property without equity should be well considered.

Especially if the first property has not yet been paid off to a large extent, it becomes difficult to deposit it as collateral. The banks do not like to see too many liabilities and then do not grant a new loan so easily. In addition, the general risk increases.

However, if the first property has been paid for to a large extent yourself or has been almost completely repaid, it can be used without complication as collateral with the bank. In this way, the full financing of a second property can be tackled without any problems.

If the first property is not suitable as collateral, there are other options for loan collateral:

A guarantee, for example, comes into question. If the borrower can no longer meet his payments, the guarantor is obliged to stand in for him. There are various forms of guarantee that should be examined carefully.

Eine weitere Möglichkeit ist die Finanzierung mit Hilfe einer Lebensversicherung. Hierbei wird das Darlehen für die Immobilie direkt ausgezahlt. Parallel dazu werden die Zinsen gezahlt, jedoch keine Tilgung des Darlehens. Stattdessen werden Versicherungsbeiträge bezahlt. Läuft das Darlehen aus, wird es mit Hilfe der angesparten Versicherungssumme zurückgezahlt. Durch die immer noch relativ niedrigen Zinsen ist dieses Modell heute allerdings nicht mehr so attraktiv. Hier besteht heute die Gefahr, dass das Darlehen nicht mehr mit Hilfe der Versicherungsbeiträge bedient werden kann.

An existing life insurance policy can also be used as collateral. Of course, the amount saved must not be too low. The bank also looks at the surrender value and includes it in the calculation. If the loan is granted, the life insurance policy becomes the property of the bank. As soon as the loan is repaid, the insurance policy is returned to the borrower.

Securities are also a good way to have better chances of getting a loan. Here, too, care should be taken to ensure that the value is in proportion to the loan amount.

Basically, it can be said that banks prefer such things as collateral whose value can be easily assessed.

Loan calculator house without equity

Would you like to know which are the most favourable financing conditions for you? You can easily check this with our financing calculator: We compare more than 300 banks for you:

400,000 Euro loan without equity capital

The cost of real estate continues to skyrocket in popular locations in German cities. This quickly raises the question of whether it is even possible to finance very expensive real estate completely without equity.

Obtaining a 400,000 euro loan without equity capital seems like no small feat at first glance. But it is quite possible to obtain such a large loan. We are also frequently asked for a 250,000 euro loan without equity capital. It is not uncommon for such financing to work out. Different factors play a role here:

The value of the property: It should be in an excellent location and outstanding condition. We at Meine-Renditeimmobilie GmbH have specialised in the selection of excellent properties, because thanks to years of experience in the industry, we know exactly the relevant criteria that make a property a goldmine in the long term.

Credit rating: The SCHUFA score should be in pristine condition in order to obtain financing without equity.

Collateral: What other financial collateral is available? Here, for example, lending on shares or real estate comes into question. Collateral is not a must, but is welcome by the bank.

Gutes Einkommen: Ein sicherer Job mit einem hohen Einkommen ist ebenfalls von Vorteil. Wichtig ist die Haushaltsrechnung, welche einen deutlichen Überschuss aufweisen muss. So kann die Bank nämlich erkennen, dass auch im Falle eines seltenen Mietausfalls monatliche Reserven vorhanden sind.
Normalerweise ist die Untergrenze ein Nettoeinkommen von 2.500 Euro monatlich.