Who would like to finance a house construction, should bring in the vast majority of cases a certain equity capital. But developers don't always literally have money in the form of account balances to use as equity. Therefore, the question often arises: is a property equity? The answer is yes, but only if, … In this article, we discuss under what conditions banks will accept a property as equity in your case. However, we also address the point when this will not be the case. In addition, we highlight the aspect of what else you can show as equity capital.
Land is in most cases equity
As a rule, credit institutions accept as equity a plot of land on which you want to build a house. The prerequisite is, of course, that there are no more debts on the property and that it belongs to you alone, respectively. The borrowers. A property still owned by parents or grandparents, for example, would not count as equity. They would first have to gift it to you or otherwise legally "make it available" to you.
- Land must be free of debt
- No more land charges in the land registry
- The property must be owned by you or. The borrowers belong to
What is the value of a property as equity??
With what value you can now put the land as equity? Perhaps you can already guess: at the current market value. How high this is, the bank determines for you. This in turn also means that land in remote areas contributes less to the amount of equity than, for example, in metropolitan areas.
Banks accept land as equity because there is value behind it. If it would not belong to you, so you would have to buy this first and if necessary. Finance. So this means that if there is an existing plot of land, the loan amount can be reduced by the value of the land.
At the same time, the land charge, which the financial institution will register with the land registry, applies to both the house and the property. So the bank has a security.
Benefits of having a high percentage of equity
A property, which belongs to you and on which no more debts load, can be financially worthwhile itself with the construction financing correctly. Not only will you need less loan amount, but interest rates could be more favorable to you. This is always the case if you bring a relatively high proportion of equity capital into the financing. After all, the higher the equity percentage, the lower the risk to the bank. And the lower the risk, the better interest rates you get. If you bring in, for example, about 20 to 25 percent of your own capital in the form of assets, plus the property, you can expect very good interest rates. In addition, in this case, the probability that the bank will give you a commitment for the construction loan is also very high.
If a property suffices as equity?
As we have seen, real property is considered equity in most cases. Now perhaps the question arises whether this is enough or whether one should possibly bring even more equity into the construction financing. It is not possible to make a blanket statement as to whether the property is sufficient as equity capital. This depends on several factors. Important in this context is what percentage of the value of the land in the total cost or. The purchase costs and how high your income is. Or in other words, how good your credit rating is.
On average, you should contribute between 20 and 30 percent of the total construction or. Contribute purchase costs to equity. If the value of the property is already equal to this value, then you will not necessarily need to provide even more own funds. The decisive factor is your creditworthiness. So, if you can afford the monthly loan installments. And also how high the total costs are.
In order to clarify this somewhat, we would like to give an example at this point. Let's assume that your property has a value of 150.000 euros, the total costs amount to 700.000 euros. The value of the property here would be around 21 percent, so according to the rule of thumb would be fine. But that still leaves 550.000 euros left that you need to finance. There however few hundred euro in the month as credit rate will not be sufficient. Your loan installment is in the 4-digit range even with a 1 percent repayment. Let's assume that the interest rate is 1.5 percent p.A. And the initial repayment 2 percent p.A. This corresponds to a monthly loan installment of around 1.600 euro! So you see, with the property you have an equity ratio of 20 percent. But if your income is not correspondingly high, this is not enough for real estate financing.
- Land alone can suffice as equity
- Creditworthiness, especially the amount of income, plays an equally important role
- If the construction costs are very high, you may have to. Even more equity capital can be brought in
What counts apart from the property still everything to the own capital funds?
Since sometimes a property as equity is not sufficient, we would like to show you here again, which means you can still bring in as equity capital. In any case, bank deposits, overnight money or other short-term liquidity belong to it. Also classic investments such as savings bonds, time deposits, building society savings or endowment life insurance policies. If you currently do not have the money at your disposal, there is often the possibility to assign these funds as well.
Security deposits, precious metals, jewelry, etc. You can also bring in as equity capital. In this case, you need to transfer the securities, jewelry, gold coins, etc. To inspirient. But sell it beforehand and you can then use the proceeds for your construction project. In the vast majority of cases, there is no possibility of pledging gold bullion to the bank, for example.
You can also use your own contributions (although you should not apply too much here) or loans from relatives to reduce the loan amount of the construction loan. Provided that you can easily pay the installment for a relative loan, you also do not have to declare the source of funds to the bank.