General information about loans without equity

Owning your own home and being free from influences, claims and perhaps even harassment from landlords is the dream of most people. Instead of transferring a considerable amount for rent every month, many think it makes sense to invest the money in installment payments for an owner-occupied apartment. Behind this is the understandable desire to be rent-free in old age. Often, however, the savings accumulated 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 mortgage loans is possible for only a tiny fraction of the population. As a rule, buyers of a property and builders take out loans from a bank. To avoid the risk of extreme indebtedness, lenders almost always require an equity share of on average 20–30 percent when granting their loans. This variant gives the borrower a certain security. Still, loans without equity are being offered more and more often. Consumers can hardly tell whether an offer is reputable. The reality is much soberer than the advertising promises, because only a small fraction of banks grant applicants a loan without any equity.

Construction financing without equity is offered more frequently but remains the exception. This form of real estate loan is also referred to in the industry as a 100-, 105- or 110-percent construction loan. Incidentals (also additional purchase costs) are largely already included in these loans. To enable the higher loan amount, the term will automatically be extended. In addition, the interest rates increase. Typical properties financed without equity are, for example, owner-occupied apartments or single-family homes. For repayment, variants such as bullet loans or time-limited loans are used. Although the monthly burden with financing without equity is significantly higher than with financing that includes equity, the buyer remains liquid.

Requirements for financing without equity

Actually, the equity portion 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. They need a regular, steady income at a medium level. It is important, for example, that the applicant has no negative Schufa entries. In addition, they usually have to provide a statement of income and expenses. From this, the lender can determine whether the borrower can pay the installments without problems. The borrower should therefore carefully consider beforehand whether they are able to bear the higher burden of installments and accruing interest over a longer period. About half of the net income should be reserved for recurring monthly, fixed expenses and should remain untouched—not used for the loan. If the requirements are met, one enjoys the advantage of full liquidity while realizing the dream of a home without equity.

Repayment variants for construction financing without equity

One repayment option for construction 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 take the fixed-interest period into account. The fixed-interest period should be agreed for the entire desired term. If the nominal interest rate does not change, the monthly installment also remains unchanged. Nevertheless, the shares of interest and principal shift during the overall term. The interest portion falls while the principal repayment portion steadily increases. In the first year, the repayment should be at least one percent of the total loan amount. It is different with a bullet loan (interest-only loan). Here you pay the monthly interest in constant installments. That is only valid as long as the nominal interest rate does not change within the fixed-interest period. The repayment installments are, for example, paid into a life insurance policy, the payout of which is used to repay the principal at the end of the term.

Full financing: Disadvantages of financing without equity

A house purchase or real estate financing without at least a portion 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. But in principle, full financing is not inherently questionable. Still, anyone without reserves should refrain from a full mortgage before buying a property. If unexpected difficult life situations such as unemployment, illness or divorce occur, the debtor can quickly get into financial trouble because of the house purchase and the associated loan. Full financing or a full loan therefore carries correspondingly high risk. It is also advisable to have some money set aside for normal repairs in the house. Accurately assessing one’s own financial situation is not always easy, especially when attractive quick construction financing is tempting.