The most important facts about buying a house without equity in a nutshell:

• It is possible to buy a house without equity if certain conditions are met.

• A distinction is made between 100% financing and 110% financing.

• Monthly instalments, interest rates and terms are generally higher for construction financing without equity.

• The bank bears a higher risk when financing without equity.

• A good and secure income is often a prerequisite for obtaining a loan.

• Many banks only finance high-quality properties with a loan without equity.

What exactly is home financing without equity?

When it comes to buying a property, most people prioritise saving money long before the purchase. Many people who are interested in buying or building put money aside for years, investing sums in a building society savings contract or in various forms of investment. However, there are other types of property financing in addition to the traditional option with an equity contribution. Financing without equity, for example, is a good way to complete a house purchase as quickly as possible. In the case of a purchase without equity, the full purchase price of a property is financed with a loan. This form of financing is divided into 2 variants, which we will discuss in more detail in the following section.

100 or 110% financing

If prospective borrowers do not wish to or are unable to contribute their own funds to the house financing, there is the option of financing a property for the entire purchase price or more in the form of full financing:

• 100% financing: In this case, credit financiers provide the full amount to pay for the property as a loan. The ancillary purchase costs are borne by the buyer.

• 110% financing: Under certain circumstances, it is even possible to finance more than the property value. In this case, in addition to the purchase price, the ancillary costs incurred when buying a house are also covered by the financing. This is referred to as full financing.

What all counts as equity?

Not only cash or money in accounts and savings books counts as equity. Sums saved in building society savings contracts are also counted as equity, as are other assets. Existing property can count as equity if it is not itself encumbered by a loan. The exact valuation may differ from bank to bank. Equity therefore includes everything that comes from your own assets and serves as collateral.

Equity capital includes

• Cash assets

• Money in bank accounts, savings books, call money accounts

• Insurance policies (e.g. life insurance, Rieser pension)

• building society savings contract ready for allocation

• Existing building plot (if it is not itself encumbered by a loan)

• Debt-free property

• other valuables, for example expensive paintings or precious metals such as gold

• Shares, investment funds, securities

• private loans from relatives

• certain subsidies, e.g. from KfW programmes

Advantages and disadvantages of financing without equity

Construction financing without equity offers both advantages and disadvantages. For example, it is an advantage that the required funds, i.e. the purchase price and any ancillary purchase costs, are quickly available for the purchase. When financing without equity, it is not necessary to save for years before buying a property. When buying a house without equity, you can take advantage of periods of low interest rates regardless of the equity available. Spontaneous purchase of a specific property is also possible with financing without equity. Ultimately, liquid assets can also be invested in other, possibly more lucrative forms of investment if the house purchase is made without equity.

The advantages at a glance:

• no need to save for years

• relatively spontaneous purchase possible

• existing assets can be invested in other forms of investment

Most of the disadvantages of home financing without equity are the less favourable credit terms. The increased risk on the part of the banks results in higher interest rates. The monthly burden also generally increases when interested parties buy a property without equity. In addition, there may be a longer term due to the higher loan amount and higher overall interest rates. In view of rising construction interest rates, a longer term can quickly prove to be disadvantageous. This is because the unfavourable conditions mean that follow-up financing often has to be provided at a significantly higher interest rate.

The disadvantages at a glance:

• higher interest rates

• higher monthly charges

• possibly longer terms

Banks bear a high risk when buying a house without equity

Buying a house without equity is not only associated with a higher risk for the buyer. This type of construction financing also harbours certain risks for the financing bank. This becomes clear, for example, if the financing without equity goes wrong. If the borrower is no longer able to service the loan instalments after buying the house, it may result in a forced sale. Often, the proceeds from the auction cannot cover the remaining debt. In this case, banks do not receive the amount owed back.

Financing a home without equity - convincing the bank

If prospective lenders do not provide any equity when financing a property, banks often react cautiously. Many banks require collateral and therefore make certain basic requirements a condition for agreeing to the financing. These include, for example

• a permanent and secure employment relationship

• a high income

• a property in a good location and with good fixtures and fittings

The cost of building finance without equity - a sample calculation

Buying without equity incurs higher interest rates, while at the same time the monthly burden of the loan instalment increases. This is easy to understand using an example. The purchase of a property with a value of 500,000 euros is to be financed. The initial repayment rate is 1 per cent and the interest rate is fixed for ten years. The first example involves the purchase of a house with no equity and full financing. In the second calculation example, 120,000 euros of equity is contributed.

It quickly becomes clear that those interested in a loan without equity are not only confronted with a higher loan instalment. They will also have to refinance a higher loan amount after the fixed borrowing rate expires and are likely to pay off their loan for longer.

The right home for a purchase without equity

Have you decided to buy a home without equity for various reasons? The best way to do this is with the right property. Most banks prefer to grant loans without equity for valuable properties. A good location is just as important as the condition of the property. You can find high-quality properties for sale with Engel & Völkers. All you have to do is enter your contact details and the criteria for your desired property in our form here. If a suitable property is available, you will be informed immediately.

Alternatively, you can contact us at any time. Engel & Völkers has an extensive network and can therefore offer you properties that are not on the public market.

Inflation and higher interest rates - how does this affect buying without equity?

Building loans have been getting cheaper and cheaper for years. However, the ECB raised the interest rate in the summer of 2022 due to inflation. Since then, interest rates for new and follow-up financing have risen. In order to protect borrowers from these higher charges, the financial supervisory authority Bafin advises German banks to pay more attention to having sufficient equity. This should reduce the risk of buyers being unable to service the loan at a later date.