Do you want to Buy a House in Germany and do not have any money to put in as a Down payment? Or even if you have enough cash but Want to Buy a House in Germany with Zero Money? Then this guide Is Exactly what you need.
Today I am going to Talk about Real Estate Financing in Germany without Equity, What exactly does it mean? Where can you get the Money to Buy a house in Germany , what is the Loan to Value Ratio and the Risks of buying a house in Germany with Zero Money.
Buying a House in Germany
What is Real Estate financing without equity?
When it comes to buying a property in Germany with zero money, it’s important to understand the difference between two options.
- You want to finance only the purchase price of the property without using your own money.
- You are looking to finance the entire real estate project, including additional costs, without putting in any of your own money.
Real Estate Loan including Nebenkosten
Let’s focus on the second option. In this case, you not only finance the purchase price but also the extra expenses associated with buying the house. These additional costs include things like property transfer tax, fees for the notary and the land registry office. Even the broker’s commission, if you’re not buying directly from a private individual or building the property yourself.
To be precise, financing without equity means you’re not using any of your own money. However, the terminology can be a bit confusing.
As 100% Financing doesn’t include the Additional costs. This means that in order to buy a House in Germany with Zero money would actually need about 110% of the House value to be financed.
Additional Cost of Buying a House in Germany
As I just mentioned, on top of the purchase price, there are additional costs that you need to consider. These costs typically range between 5% and 12% of the purchase price.
The exact amount depends on a few factors. One major factor is whether you need to pay a broker, which can add around 3.5% to the costs. Another important factor is the location of the property, as it determines the property transfer tax you have to pay. This tax can range from 3.5 to 6.5%.
To get a clearer picture of how much these additional costs might be in your specific state, here is a table that provides information on the approximate amount of the additional costs.
Related Guide: Don’t buy a Apartment in Germany without knowing this
Where can you Get Funds to Buy a House in Germany?
Let’s be clear: 110% financing is almost Impossible to get. In most cases, banks will say “no” to this type of financing. The main reason is that you’re not even using your own money to cover the additional costs.
For banks, these additional costs are very tricky because they don’t hold any tangible value. That’s why most banks require borrowers to use their own capital to cover at least the extra expenses. However, there are some cases where 110% financing can still work, Which I will discuss later in the Guide.
But here’s the good news: Many banks do offer 100% financing. In some cases, you may even get very close to that limit, with like 90 to 95% financing.
However, it’s important to understand that the bank’s assessment of the property’s value may not always match your own. This is where another term from the banking world comes into play—the loan-to-value ratio.
What is the Loan to Value Ratio?
The term loan-to-value or financing ratio, refers to simply the percentage ratio between the loan a German Bank provides and their evaluation of the property’s value.
Let’s look at an example to understand this better.
Suppose you want to buy a house in Germany that is worth €400.000. At 10%, you would have to pay €40.000 in Additional Buying costs. Making the total buying costs at €440.000.
So even if put in €80.000, the bank would have to grant you a loan of €360.000. In this case the loan to value ratio would be 90%.
However, it’s important to note that the value the bank assigns to the property may be lower than what you expect.
After the recent increase in real estate prices, many properties might be overpriced, and the bank’s valuation may be lower than the sellers’ price expectations.
Therefore, it’s crucial to consider how the bank values your dream house in Germany, as it determines the upper limit for the loan. This upper limit influences whether you can proceed with normal real estate financing or if you require additional loans and must meet further conditions for loan approval.
You can use a German Mortgage Calculator to calculate how much loan you can get with your specific requirements.
How to buy a house in Germany with Zero Money!
Many banks offer the possibility of financing the entire purchase price, as long as your income is stable and sufficiently high. The bank also needs to determine that the purchase price is reasonable when evaluating the property.
With 100 percent financing, you’re responsible for financing the additional costs on your own. If real estate prices are high and your savings are low, this can add up to larger sums of money.
In the worst-case scenario, where the property transfer tax rate and brokerage costs are high, you’ll have to pay an additional 12% on top of the purchase price. Meaning For every €100,000 in purchase or construction costs, that’s €12,000. So, for an apartment in Germany that costs €200,000, you would need €24,000 in equity. Just to cover the Additional cost for buying that apartment in Germany
Now, where can you find 100% financing? Many banks that offer real estate financing, include direct banks and large branch banks. Savings banks and Volksbanks are also willing to finance the full purchase price if the overall financing meets their criteria.
Lets talk about getting 110% Financing
Real estate financing without any equity is often referred to as “110 percent financing” or “full financing.” In this type of financing, the total amount includes the purchase price as well as additional costs, which are typically set at a rate of 10%. To obtain this kind of financing, you usually need more than one bank and favorable conditions, especially in terms of income.
How 110% financing in Germany works
You secure a Real estate loan from a bank for a portion of the purchase price (usually around 70 to 80%). This is backed by the property itself. Additionally, you take out a subordinated loan from another provider to cover the remaining purchase price and additional costs.
A subordinated loan carries a higher risk for the lender. If you are unable to make your loan payments and the property needs to be foreclosed. The creditor of the subordinated loan will only be repaid after the first bank has received the outstanding loan amount.
Subordinated Debt
An unsecured loan or bond that ranks below other, more senior loans with respect to claims on assets.
If the proceeds from the property auction are insufficient, the subordinated loan may only be partially repaid or not repaid at all. Due to this increased risk, subordinated loans are more expensive than regular mortgage loans and typically have higher interest rates, similar to personal loans.
The division of loan between the first and second banks depends on how much financing the first bank is willing to provide. If you opt for 100 percent financing, only the additional costs will be financed through a subordinated loan.
That is why Financing without equity can be quite complex. As It involves multiple lending banks, it’s crucial to have clear agreements and coordinated processes. Your creditworthiness, which includes the property and income situation, needs to convince the banks. The main goal is to ensure that you can afford the loan installments in the long run.
The dangers of Full Financing in Germany
Real Estate financing without any upfront money can quickly become a financial challenge. When you opt for this type of financing, you’re starting off with limited funds. While it may seem manageable as long as the mortgage interest rates remain stable and your property potentially increases in value, there are warning signs of a halt or even a decrease in real estate prices in many parts of Germany.
However, the personal risks associated with this type of financing are perhaps even more important to consider. If you find yourself unable to make the loan payments due to illness or unemployment. There’s a possibility that the property could be foreclosed upon. If the proceeds from the foreclosure don’t cover the outstanding debt, it could result in significant financial losses and might even lead to personal bankruptcy.
When you contribute less equity to the financing, the bank perceives a higher risk of default. To compensate for this increased risk, the bank may charge higher interest rates.
That is why it is absolutely essential to make your calculations first and Find out How Much House Can you Afford in Germany
Disclaimer: None of the content in this article is meant to be considered as investment advice, as I am not a financial expert and am only sharing my experience with stock investing. The information is based on my own research and is only accurate at the time of posting this article but may not be accurate at the time you are reading it.