Financing a house purchase with equity: This is what counts

If you want to buy a property, you need to think about the right house purchase financing in time. In addition to the loan for the purchase of a house, equity also plays a decisive role. There are ways and means by which you can optimally set up your home financing – and that's where equity comes into play. Here I show you what really matters and what you need to pay attention to.

House purchase financing: What is equity?

The term equity is closely associated with real estate financing. While it is certainly an option in today's world to obtain construction financing without existing equity, this approach also carries greater risk.

There are definitely differences in what reserves are considered equity by the bank. This includes all funds that are, for example, in overnight or time deposit accounts. Another source of equity could also be a classic building savings contract. In addition, debt-free real estate or land is classic equity that can be used for a home loan.

The following counts as equity:

• Shares
• Savings accounts such as call and time deposit accounts
• Building savings contract
• Fund savings plan
• Debt-free real estate
• Debt-free real estate
• Private loans

How much equity is necessary for real estate financing?

There are many good reasons why the loan for buying a house should be taken out with equity capital.

Equity lowers the risk of financing, for example. Because of this you also get lower interest rates at the bank. This in turn means that you can pay off your debts more quickly. How much equity is necessary for a home loan depends on a few individual factors.

The fact is, the more equity you can bring in, the better it is. The more equity you can include in your financing, the more secure your real estate financing will be, thus reducing the risk that you will fall into debt. A rule of thumb states:

• The ancillary purchase costs of around 10-15 percent of the purchase price should be included in the financing as equity capital.
• Apart from that, it makes sense to have a buffer on the side for possible maintenance costs.

The advantages of equity

Buying a home with equity definitely comes with some advantages. These look like this:

• The house purchase is much cheaper. Bringing in your own money lowers your financing risk. That's why banks grant lower interest rates to borrowers with equity. Without equity, it is not uncommon for interest rates to double or triple.
• Equity increases the chance of obtaining financing at all. Because by the residential real estate credit guidelines the banks are urged to consider the financial conditions of their customers still more strongly in the decision whether a credit is granted.
• The financing risk decreases significantly with equity. If you should become insolvent due to certain circumstances, the bank can initiate a foreclosure sale. You will have a much better chance of getting out of the financing without incurring large debts.
• Financing with equity is also much faster. The lower interest rate not only saves you money, but also allows you to take advantage of a higher repayment rate from the outset. Accordingly, you can pay off your debts faster and bring the construction financing sooner over the stage. This is a great advantage that you can benefit from.

Self-employment vs. Equity

Of course, every bank wants a certain security and therefore relies on equity capital. However, when building a house or buying a home, there is the option of doing it yourself and thus becoming self-supporting. This can then be counted as equity by the bank. For good reasons: Because after all, the construction costs sometimes decrease immensely if you go in own contribution and do certain work yourself. At this point, however, it is important to critically examine your own contributions. It is namely important that the work is carried out competently. Otherwise this would only bring disadvantages in the end.

How much equity to bring in?

If it comes to applying for a loan to buy a house, it is always good if you bring in as much equity as possible. But caution is also advised. It is always sensible if you do not use up all your savings completely. When buying a house, unforeseen costs can arise at any time. These should also continue to be covered. In addition, life often has surprises to offer. All it takes is for the washing machine to break or the offspring to go on a school trip. Contingencies like these should be kept in mind at all times during the home purchase financing process to avoid a nasty surprise in the end.

It is also the case that if you rent out your property in the future, the financing costs can be deducted for tax purposes as income-related expenses. Taking out a loan for the purchase of a house therefore has certain advantages in this respect as well.

Loan for house purchase: Consultation is the be-all and end-all

A house purchase is usually an individual matter. Especially with regard to finances. Many students and young professionals can only afford to rent.

So if you want to take out a loan to buy a house, you have to deal with more than just equity. Since this is a complex issue, it makes sense to seek detailed advice. An independent agency is recommended for this. It does not hurt if you rely on sound advice. You are also welcome to contact various specialists and then decide at your leisure how exactly you will approach the financing of your house purchase.