Building a new house costs a lot of money. Buying a property is also associated with high costs. Only a few builders can afford to realize their dream of owning their own home out of their own pocket. New builds and purchases usually have to be financed with a loan. There are also unavoidable additional costs such as notary fees, estate agent fees, fees for entry in the land register and, last but not least, land transfer tax.
Normally, banks expect builders and buyers to contribute around 20 to 40% of the costs as equity. Banks reward this personal contribution with lower interest rates on the construction financing or real estate loan. If no equity is available for the purchase or construction of a house, the entire costs must be financed with a loan. You can find out whether real estate financing without equity is even possible in the following guide.
Attention: Please note that all information is provided without guarantee and this article does not constitute credit advice. For detailed information on your individual circumstances, please consult your financial or bank advisor.
All calculation examples given are for illustrative purposes only and are fictitious.
Is real estate financing even possible without equity?
Real estate financing without equity is possible. Many, but not all, savings banks, cooperative banks, direct banks and the large branch banks offer you this option. Under certain conditions, they are prepared to finance the full purchase price or the entire construction costs.
100% and 110% financing - the two types of construction financing without equity
There are two variants of construction financing without equity. The so-called 100% financing and the 110% financing. With 100% financing, builders receive a real estate loan without equity in the amount of 100% of the pure construction costs or the purchase price of a property. With this form, the ancillary construction costs or ancillary purchase costs must be financed by the client.
The ancillary construction costs or ancillary purchase costs are also loan-financed with 110% financing. With this type of financing, clients do not provide any equity for the purchase or construction of a property. For this reason, 110% financing is also referred to as full financing.
It is generally recommended that at least the ancillary construction or acquisition costs are raised as equity. These include, for example, the notary fees for the purchase of the plot, the costs for entry in the land register, development costs, land transfer tax and, if applicable, the costs for tree felling work, for clearing the plot or a soil survey. These costs add up to an average of 15 to 20 % of the total construction costs.
If no other collateral can be provided, the loan for a construction loan is secured by the property. As a rule, a land charge is registered in favor of the bank. However, a property cannot be mortgaged indefinitely. The so-called lending limit is the upper limit up to which a property can be mortgaged. The bank’s internal regulations often specify how much a property may be mortgaged.
The lending limit for real estate is usually around 80% of the estimated market value of the property. This is the amount the bank expects to receive if the property has to be sold because the loan can no longer be serviced. By setting the lending limit below the market value, the bank protects itself. In the case of construction financing without equity, however, the property is mortgaged at 100 % or more. As a result, the bank runs a higher risk of not being able to recover some of the money borrowed if the loan can no longer be repaid. Borrowers have to pay higher interest rates for this higher risk to the bank if they want real estate financing without equity. For some banks, however, this is the reason for not offering 100% or 110% financing. They will only finance the purchase or construction of real estate up to the loan-to-value limit.
Real estate financing without equity: these are the risks and disadvantages
When financing real estate without equity, it is not only the financing bank that takes on a higher risk. In the case of construction financing for which no equity is available, you also take on certain risks and at least one disadvantage compared to a real estate loan with equity. The following chapters show the risks and disadvantages you should expect with real estate financing without equity.
The disadvantages of building finance without equity
Probably the biggest disadvantage of construction financing without equity is the high interest rates. Compared to a mortgage with equity, banks charge an average of around 0.5 to 1 % higher interest for their higher risk. At first glance, this doesn’t seem like much. However, at the end of the term, this interest adds up to a five-digit euro amount, depending on the loan amount.
An example: 300,000 euros are required to finance a house. If 50,000 euros are raised as equity, the loan amount is 250,000 euros. With 100% financing, the loan amount is 300,000 euros. The interest rate for 100% financing is only 0.35% higher at 1.5% compared to 1.15% for construction financing with equity. Nevertheless, with a term of 15 years, you will have to transfer around 21,000 euros more interest to the bank.
In addition to the higher interest rates, the repayments for a real estate loan without equity are also noticeably higher. The repayment rate for 100% financing is initially around 2 to 3%. Overall, this results in a noticeably higher monthly burden for you as a borrower compared to a mortgage with equity.
Builders can reduce the interest burden and thus the overall monthly charge somewhat if they can take advantage of grants and low-interest loans granted by the Kreditanstalt für Wiederaufbau (KfW), the BAFA (Federal Office of Economics and Export Control), the federal state or even the municipality for the installation of energy-saving heating systems such as heat pumps.
The biggest disadvantage of construction financing without equity is probably the high interest rates. Compared to construction financing with equity, banks charge an average of around 0.5 to 1 % higher interest rates for their higher risk. At first glance, this doesn’t seem like much. However, at the end of the term, this interest adds up to a five-digit euro amount, depending on the loan amount.
An example: 300,000 euros are required to finance a house. If 50,000 euros are raised as equity, the loan amount is 250,000 euros. With 100% financing, the loan amount is 300,000 euros. The interest rate for 100% financing is only 0.35% higher at 1.5% compared to 1.15% for construction financing with equity. Nevertheless, with a term of 15 years, you will have to transfer around 21,000 euros more interest to the bank.
In addition to the higher interest rates, the repayment rate for a real estate loan without equity is also noticeably higher. The repayment rate for 100% financing is initially around 2 to 3%. Overall, this results in a noticeably higher monthly burden for you as a borrower compared to a mortgage with equity.
Building owners can reduce the interest burden and thus the overall monthly charge somewhat if they can take advantage of grants and low-interest loans granted by the Kreditanstalt für Wiederaufbau (KfW), the BAFA (Federal Office of Economics and Export Control), the federal state or even the local authority for the installation of energy-saving heating systems such as heat pumps.
The risks of building finance without equity
A loan-financed construction project always involves various risks. If the borrower gets into payment difficulties, for example because their income is lost due to the loss of a job, a long-term illness or an accident, meaning that the loan can no longer be serviced as agreed, the bank is entitled to foreclose on the property. The bank uses the foreclosure sale to try to settle the outstanding claims. As a rule, however, the proceeds from a forced sale are not sufficient to repay the remaining debt in full. This is particularly the case if the property is foreclosed in the first few years after the loan is taken out. In a forced sale, properties generally achieve a price that is significantly below the actual market value. If this is the case, you as the borrower are liable for the outstanding debt with your personal assets. If you are unable to settle this claim, you are threatened with personal insolvency.
However, this is not the only risk with a mortgage without equity. A sudden and sustained loss in value of the property is also problematic. In the event of a loss in value, for example because a bypass is built behind the property at some point in the future, the bank is entitled to demand further collateral. If this collateral cannot be provided, the bank can in turn foreclose on the property in order to pay off the outstanding debts. This is also possible if you always pay your installments on time and in full.
Real estate financing without equity: What are the requirements?
Since real estate financing without equity is associated with a higher risk for the bank, you as the borrower must meet certain requirements. The most important requirement for a real estate loan without equity is that the borrower has an excellent credit rating. The income must be sufficiently high and, as far as we can judge, secure for the future. Civil servants and public sector employees therefore have a good chance of being approved by the bank for real estate financing without equity. The income of these two occupational groups is considered secure and will increase over time if nothing unforeseen happens.
Salaried employees have less of a chance. Here it depends, among other things, on which employer they work for. Applying for construction financing without equity is almost hopeless for self-employed entrepreneurs and freelancers. In the case of freelancers, however, the profession in which they work plays a role. Doctors with their own practice or lawyers have comparatively good chances. Freelance journalists, on the other hand, do not.
In principle, the income must be high enough to service the loan on the one hand and to continue to live within the usual framework on the other. It should also be possible to build up reserves for unscheduled repairs and, in later years, modernization measures. A current loan does not necessarily stand in the way of construction financing without equity. The current and expected future income situation also plays a role here. However, a low Schufa score and negative credit entries in general are usually an exclusion criterion.
Which property is to be financed also plays a role when applying for construction financing without equity. Banks are more inclined to approve 100% financing if the property is expected to increase in value. The location of the property should also be as prime as possible. Banks prefer to approve a real estate loan without equity for new builds. There is an opportunity for existing buildings if these properties are in very good condition.
Last but not least, the age of the borrower also plays a role. The Residential Real Estate Credit Directive stipulates that construction financing must be concluded before retirement age. This legal requirement applies to all banks. An exception is only possible if the borrower expects a sufficiently high pension income. Here again, civil servants and public sector employees have an advantage.
Real estate financing without equity: What should borrowers consider?
There are various important points to bear in mind when financing a property without equity. In the following sections, we have put together 4 specific tips for you that can help you to manage the financing if you do not have any equity for the mortgage.
Tip 1: Realistically assess affordability
A high income can also be used to finance an expensive home. In principle, this is correct. However, many things are often forgotten that need to be financed in addition to building a house. These include the cost of living, new clothes, insurance, one or two cars, the occasional vacation and much more. Before considering building finance without equity, it is therefore important to draw up a realistic list of all costs.
The net income minus these expenses is the amount that could theoretically be used for home financing without equity. To cover unforeseeable expenses, a certain percentage should be deducted from this available part of your income. In this way, you can determine how much money is available for the monthly installments when financing a property without equity. Potential lenders will also ask for such a statement. You know that many prospective home builders calculate their financing options.
Tip 2: Ensure an appropriate repayment rate and compare offers
People who build are often willing to sacrifice a lot for the dream of owning their own home. However, this sacrifice should remain within reasonable limits so that the joy of owning a home does not turn into frustration due to self-imposed restrictions. The repayments should not allow you to live far below the level you are used to. It is important to bear in mind that building finance without equity is always more expensive than building finance with equity. The initial repayment rate is around 2 to 3 %. In addition, there is interest of at least the same amount. It is therefore advisable to compare which bank offers the most favorable conditions. If your house bank charges 0.5% more interest than another bank, then it is probably not the right partner for a real estate loan without equity.
Tip 3: Minimize risks and protect construction financing with insurance
No one can predict what tomorrow will bring, let alone what will happen in one, five or ten years’ time. If the income on which the construction financing is based is lost for a long time or completely due to illness or an accident, the loan installments can usually no longer be paid. In the end, there is a risk of losing your home through foreclosure. When financing a home without equity, builders should therefore always ensure that they have sufficient insurance cover so that the loan can continue to be repaid even if their income is lost. For example, through occupational disability insurance, residual debt insurance or term life insurance.
Tip 4: Build up reserves for maintenance and repairs
100% financing runs for two or three decades. During this period, more or less costly repairs and maintenance work must inevitably be carried out on a property. Reserves must be set aside for a new heating system, repairs to the roof, but also for the replacement of defective household appliances. Without reserves, borrowers may be faced with the choice of either carrying out the repairs or continuing to pay the loan installments.
Experts recommend building up a reserve of at least two to three months’ salary. If income allows, a home loan and savings contract can also be used to build up reserves. Home loan and savings contracts offer the advantage that they can be lent at favorable rates over and above the amount already paid in. It is also possible to take out a low-cost loan after the savings phase and use it to make a special repayment on an expensive property loan, for example. It must be clarified in advance whether the bank will allow an unscheduled repayment or may charge a high early repayment fee. The possibility of unscheduled repayments and the bank’s conditions for these repayments should be agreed in the loan agreement.
Is a real estate loan possible without equity? Our conclusion
Construction financing without equity is always associated with a high level of risk. Both for the client and for the bank. The bank compensates itself for this risk with a higher interest rate. Financing without equity is therefore always more expensive than financing with a certain amount of equity. If possible, you should therefore always try to cover at least part of the financing costs for a property with equity. In principle, 100% financing for a property should only be considered if your income situation is very good and stable. If these conditions are not met, or if no reserves can be built up due to the debt service, 100% financing is not an option.
