A beautiful garden, more space for the children or simply to do what you want in the house. To fulfil your dream of owning your own home, you don’t necessarily need large reserves. Construction financing is even possible without any equity. But: This so-called full financing of a house purchase is expensive and therefore risky. Here you can read when it is not advisable and under what conditions it can still make sense.
Explained beforehand: What a mortgage without equity means
Anyone who wants to build a house actually only receives financing if they contribute at least 20 percent of their own money. This is a basic rule of many banks. But some financial institutions also offer construction financing without any equity. There are two possibilities:
Financing a house construction to 100 percent: Here the bank takes over the complete construction costs. In addition, however, there are other expenses that you have to pay out of your own pocket. These so-called ancillary acquisition costs consist, for example, of the land transfer tax, costs for notary and estate agent as well as the fees for an entry in the land register.
Building loan including ancillary acquisition costs at 105-110 percent: With this variant, the bank includes the ancillary acquisition costs in the financing. So you pay nothing extra yourself.
What advantages and disadvantages does full financing have?
Only paying the ancillary purchase costs on your own account or even having everything financed by the bank – that sounds tempting. However, construction financing without equity has its pitfalls and is therefore only suitable in very specific cases.
Disadvantages of home loans without equity:
With a full financing you pay higher interest and fees than with a financing with equity. Why? Because your lender will lend you more money and thus run a higher risk of loss. After all, he has to cover himself in the event that one day – for whatever reason – you are not able to repay him your debts. It becomes particularly expensive if the bank also covers the ancillary purchase costs. For you this means:
The repayment of the loan usually takes much longer.
You will have to pay a higher instalment every month. This means you have less money for your daily needs and a greater risk of getting into payment difficulties.
Follow-up financing becomes expensive: a building loan usually has a fixed interest rate for a certain period of time, for example for ten or 20 years. What is left of the loan sum after that is called residual debt. This must be refinanced. But under certain circumstances, the interest rate may rise until then. Just one percent more can then increase your new loan rate significantly. This is particularly important in the case of a construction loan without equity capital, as the residual debt is usually very high.
- Advantages of full financing:
- Your dream of a house will come true even with few or no reserves.
- You can keep your savings in your back pocket and thus remain liquid.
- You don’t have to wait long until you have enough equity.
Special cases: When building without equity capital can be useful
Banks only grant a home loan after a thorough examination of your financial circumstances. If you do not use your own money, you should therefore meet as many of these requirements as possible:
- As a borrower you have a high income.
- Your job is very secure.
- Already during construction you pay attention to the future increase in value.
- Not only do you earn a lot, you also start financing early on.
Building owners need a high income. As already mentioned, buying a house without equity increases the default risk for the bank and therefore leads to higher rates. Therefore, the bank is more likely to grant you full financing if you are in a good financial position. This means: Only if your account is always clearly in the black at the end of the month should you even consider a mortgage without equity.
A secure job is important. In addition to the pure amount of your income, how secure it is also counts. Fixed employment contracts are therefore better than fixed-term contracts. A job that is difficult to terminate, for example as a civil servant, also increases the chances of obtaining a mortgage without equity.
The house should have potential. Are you building your own home in a prime location that is expected to increase in value significantly? Then the bank is more likely to grant you the desired funds. The reason: If you become insolvent over the years, you can sell your property at a profit. Then you will no longer own your own home, but at least you will have less or no debts.
Starting early is worthwhile. Construction financing without equity is particularly suitable for young people who already earn a lot. They may not yet have been able to accumulate reserves which they can use as equity. But with a high income, they have the financial leeway to pay the high credit rates of a full financing.
What you should pay attention to with a full financing
Since a construction loan without equity capital costs more, good contractual conditions are particularly important. This is to be observed:
- Low interest rates pay off. Even small differences in interest rates make enormous differences over the years. Therefore you should pay attention to every half percent.
- The term should be as long as possible. We are currently in a low interest rate environment. It is therefore worthwhile to pay fixed interest on loans for as long as possible.
- Therefore a building loan with equity is better
- With equity capital it is easier to get a loan. It also reduces the total cost of financing. Because the less money you have to borrow from the bank, the more you save later on monthly installments and interest. And: You can pay back your debts faster.
You want to keep your building loan as small as possible? Then it is also possible to pay 30 or 40 percent equity, which can come from several sources. Perhaps you have a building loan agreement, a fund savings plan or can take out a private, interest-free loan. The more equity you provide when building a house, the more you save on financing costs. Or simply keep additional money as a reserve in case renovations become necessary or your income drops unexpectedly.