The issue of equity inevitably affects you as a borrower sooner or later. It is fundamental for the amount of a loan and thus the total cost of the loan. Before discussing the required amount of equity, the term should be explained as such.
1st component: debt
Your real estate financing always consists of two components. The larger part is debt. This is a loan that is usually issued by a bank and attracts interest accordingly.
2nd component: equity
In addition, as the client, you also contribute your own financial resources to the financing. These are then currently available assets, ie savings, and reserves of recent years.
This does not necessarily have to be in the form of cash or credit on the savings account. Fixed-interest securities or gold coins are also included in equity. Shares, bonds, and fund units should also be taken into account, but it should be noted that these may fluctuate in value between the time of planning and that of borrowing.
The amount of the loan
Logically, the required amount of the loan is the smaller the larger the equity capital. Interest rates also decrease with your available capital. It is therefore generally necessary to raise as much equity as possible for mortgage lending. In general, this part remains relatively small, but most builders are just at the beginning of their professional future.
Do not worry, that’s not a big deal, but equity should reach a certain minimum level. In the case of mortgage lending, the share should be between 7.5% and 30% so that you can assume sustainable financial viability.
It sounds relatively much at first glance, but where the future property serves as security. So how does this scale come about? Banks simply do not want to grant loans for the full amount of property. If the insolvency of the borrower ceases, the bank will auction the deposited security. It rarely comes out a market-driven price, deviations down are the rule.
Do I get a real estate loan even without equity?
Now, if the loan was granted without equity and thus goes over the full amount of the actual market value, the bank has a fairly large so-called “blank share”, that is not sustainably secured part. It follows either that is not funded or the interest rate increases.
It is important to note that the amount of security is not based on the actual purchase or construction price. The bank compiles its own report and thus determines the market value of the property.
Then she measures the interest rate. As a rule, however, the two variables hardly differ from each other. However, it is increasingly common for regions that have risen sharply in price that the banks are making clearer markdowns.
Exemplary equity account
An example should clarify how the required amount of equity is calculated explicitly:
The price of your property is 500,000 USD. Consequently, you need to finance your property financial resources in the amount of just this 500,000 USD. Since you are absolutely creditworthy, visit your bank and discuss the formalities.
The bank will now determine the actual market value of the property. And then the so-called mortgage lending value. This is the sustainable value for the bank including a haircut.
This is, for example, in an appraisal at 480,000 USD, which is why the bank is willing to give a loan in the amount of 480,000 USD * 80 percent = 384,000 USD in good interest. At 60% this would be much lower.
The difference between credit and construction price is $ 116,000, which you now have to cover with your equity or finance more expensive, or some banks charge a more expensive Mischzinz on the total sum.
In some federal states, there are also regional funding institutes that offer these “subordinated” loans at fairly good interest rates. As an independent financial service provider, we are happy to advise you on such questions!
Do you still have questions about equity? Or would you like more information on insurance, mortgage lending, financing, grants or similar?