General information on loans without equity

Owning your own home and being free from influence, claims and perhaps even harassment by landlords is the dream of most people. Instead of transferring a considerable monthly sum for rent, many think they can invest the money in installment payments for a condominium. Behind this is the understandable desire to be able to live rent-free in old age. Often, however, the accumulated assets are not sufficient to finance a home. Loans for real estate that require no equity at all are therefore becoming increasingly popular.

Being able to move into your own four walls without a mortgage is possible for only a very small fraction of the population. In general, buyers of a home or property and builders need loans from a bank. To avoid the risk of excessive indebtedness, lenders almost always require an equity share of an average of 20–30 percent when granting loans. This option gives the borrower a certain degree of security. Nevertheless, loans without equity are being offered more and more frequently. Consumers can hardly tell whether an offer is reputable. Reality is much more sobering than advertising promises, because only a small fraction of banks grant applicants a loan without any equity.

Although mortgage financing without equity is offered more often, it is still the exception. In the industry this form of real estate loans is also called a 100-, 105- or 110-percent construction loan. Incidental costs (also purchase incidental costs) are largely included in the loans. To enable the higher credit limit, the term must automatically be extended. Interest rates also rise as a result. Typical properties financed without equity are, for example, owner-occupied flats or single-family houses. For repayment, variants such as fixed loans or time-limited loans are used. Although the monthly burden with financing without equity is considerably higher than with financing with a personal contribution, the buyer remains liquid.

Requirements for financing without equity

Actually, the equity share should stabilize the financing, which is why most banks impose higher requirements when approving such a loan. It is still advisable not to finance all costs with borrowed capital. A basic requirement is always the creditworthiness of the borrower. He or she needs a steady, regular income of a moderate level. It is important, for example, that the applicant has no negative Schufa entries whatsoever. In addition, they usually have to provide a comparison of their income and expenses. From this, the lender can determine whether the borrower can comfortably repay the installments. The borrower should therefore carefully consider in advance whether they are able to bear the higher burden of installments and accrued interest over a longer period of time. About half of the net income should be reserved for recurring, fixed expenses and must remain untouched, not used for the loan. If the requirements are met, one enjoys the advantage of full liquidity while at the same time fulfilling the dream of owning a home without equity.

Repayment options for mortgage financing without equity

One repayment option for mortgage financing is the annuity loan (loan with fixed repayment amounts). Banks prefer to grant private loans in the form of annuity loans. If you take out such a loan, you must definitely consider the fixed interest period. The fixed interest period must be agreed upon for the entire term in advance. If the nominal interest rate does not change, then the monthly installment does not change either. Nevertheless, during the total term the shares of interest and principal repayment shift. The interest portion falls while the repayment portion steadily increases. In the first year, the repayment should be at least one percent of the total loan amount. This is different with a fixed loan. Here you pay the monthly interest with constant installments. However, that is only the case if the nominal interest rate does not change within the fixed interest period. The repayment rates are, for example, paid into a life insurance policy, the payout of which is used to repay the loan at the end of the term.

Full financing: disadvantages of financing without equity

A house purchase or a real estate financing without at least a fraction of saved assets is also called full financing and is significantly more expensive than a loan with an equity share. This naturally affects the monthly repayment rate. In principle, full financing is not questionable. However, those who have no reserves should still refrain from a full loan before buying property. If unexpected difficult life situations such as unemployment, illness or divorce occur, the debtor can quickly get into financial distress because of the house purchase and the associated loan. A full financing or full loan therefore carries a correspondingly high risk. It is also advisable to have some money left for normal repairs in the house. Correctly assessing one’s own financial situation is not always easy, especially when quick construction money is tempting.