No ticky, no washy? Buying a house or apartment without equity
Buying a property without equity: Not risky, but intelligent. The Leverage in an investment property ensures significantly higher returns. For people who want to own their own home, the use of borrowed capital often makes it possible to own their own property. Regardless of the motive for using borrowed capital, there are a few requirements and risks to bear in mind. We explain what is important when taking out a loan without equity.
Getting a loan without equity
In principle, the higher the equity invested, 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. Making other people’s money – in this case from banks – work for you.
The situation is different with a loan to buy a home without equity: a lower interest rate is important, the “return” on the home is secondary. Home buyers should therefore maximize their equity investment in order to reduce interest costs.
What exactly is equity?
Equity is the financial resources you have at your disposal. Put simply, 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 when buying a house or apartment.
Normally, a property is purchased partly with equity and partly with borrowed capital. In most cases, a corresponding loan is taken out from a bank for the borrowed capital. The amount of this possible loan depends on the personal, but also the general current economic situation.
The use of borrowed capital offers the major advantage that less or no equity is required. The personal reserves can then be used and invested elsewhere, e.g. several investment properties can be purchased or invested in other types of investment. In addition, the use of borrowed 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 percent financing (when only the ancillary purchase costs are contributed as equity) or 110 percent financing (when even the ancillary purchase costs are financed in full)
Yield property without equity
To illustrate this, let’s look at three examples with different financing arrangements and the respective returns: The property that is 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, there are no interest payments. The yield is calculated by dividing the rental income by the purchase price. This results in a rental yield of 4.1% in this example.
| 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 your 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 ancillary purchase costs varies from state to state. In general, it can be assumed to be around 10 to 15% of the purchase price. In our example, we assume 13% (32,500 euros). The return on equity here is approximately 31.3%.
| Equity capital employed | Return on equity |
|---|---|
| 32.500€ | 31,3% |
These examples show quite clearly how easily the expected return can be determined by the amount of equity capital employed. Common distributions of equity and debt capital are:
- 80% DC/20% + Incidental purchase costs as EC
- 100% DC/ Incidental purchase costs asEC
- 110% DC/ 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 your income situation. For 100% financing (100% of the purchase price is financed, only the ancillary purchase costs are to be paid from equity), a good and secure income is required, among other things. For this reason, you cannot choose the amount of financing via borrowed capital yourself.
In the previous paragraph, we already mentioned possible variants of the distribution of equity and debt. 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 carefully considered, as it also involves different risks.
The 110% variant is even more “affordable”. 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. Incidental purchase costs are incurred with every real estate purchase. They consist of notary and land registry costs as well as land transfer tax. If an estate agent is involved in the purchase, these costs are also included. The land transfer tax is a matter for the federal states and varies from state to state. It ranges from 3.5 to 6.5 percent.
Buying real estate without equity makes sense
Whether it makes sense to buy a property without equity 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. If you run 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 if there is a lucrative opportunity to invest the money as an alternative 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 option to work optimally, the rental income must cover the interest and repayment as far as possible. In this way, you can build up long-term assets without having to raise much (or any) capital yourself.
Second property without equity
Once the first property has been purchased, many people consider adding a second property to their portfolio without using equity. Purchasing this second property without equity should be carefully considered. Especially if the first property has not yet been paid off to a large extent, it will be difficult to put it up as collateral. Banks don’t like to see too many liabilities and are then less likely to grant a new loan. The general risk also increases.
However, if the first property has been largely paid for by yourself or is almost fully repaid, it can easily be used as collateral with the bank. This means that 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 loan collateral options:
- For example, a guarantee can be considered. If the borrower can no longer meet their payments, the guarantor is obliged to stand in for them. There are various forms of guarantee that should be examined carefully.
- Another option is financing with the help of life insurance. In this case, the loan for the property is paid out directly. At the same time, the interest is paid, but the loan is not repaid. Instead, insurance premiums are paid. When the loan expires, it is repaid with the help of the saved insurance sum. However, due to the still relatively low interest rates, this model is no longer as attractive today. There is now a risk that the loan can no longer be serviced with the help of the insurance premiums.
- An existing life insurance policy can also be used as collateral. Of course, the sum saved must not be too small. The bank also looks at the surrender value and includes this in the calculation. If the loan is granted, the life insurance policy becomes the property of the bank. As soon as the loan has been repaid, the insurance policy is returned to the borrower.
- Securities are also a good way to improve your chances of getting a loan. Here, too, care should be taken to ensure that the value is in proportion to the loan amount.
In principle, it can be said that banks prefer things whose value can be easily assessed as collateral.
Home loan calculator without equity
Would you like to know what the most favorable financing conditions are for you? You can easily check this with our financing calculator: We compare more than 500 banks for you:
400,000 euro loan without equity
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 properties completely without equity.
At first glance, obtaining a 400,000 euro loan without equity seems like no small feat. But it is quite possible to obtain such a large loan. We also frequently receive requests for a 250,000 euro loan without equity. It is not uncommon for such financing to work out. Various factors play a role here:
- The value of the property: It should be in an excellent location and in outstanding condition. Meine-Renditeimmobilie specializes in the selection of outstanding properties, which are carefully selected thanks to years of industry experience and knowledge of the relevant criteria.
- Creditworthiness: Your SCHUFA score should be impeccable in order to obtain financing without equity.
- Collateral: What other financial collateral is available? Lending against Shares or real estate for example, is an option Collateral is not a necessity, but is welcome by the bank.
- Good income: A secure job with a high income is also an advantage. It is important to have a clear surplus on your household accounts. This enables the bank to recognize that monthly reserves are available even in the event of a rare rent default. Normally, the lower limit is a net income of 2,500 euros per month.
- Guarantee: A close relative with excellent financial standing can provide a guarantee if no other form of collateral is possible.
We look forward to hearing from you to discuss your personal options for investing in an investment property without obligation.