Builders and buyers do not necessarily have to bring in 30 percent equity and should, under certain circumstances, also come to the project with less financial resources. This is indicated by the independent MGF Finance Good in a recent article. The experts recommend that the 30% equity ratio recommended by consumer proponents should not be seen as an unquestionable dogma.
Especially in an environment of low interest rates and moderate inflation, a higher debt ratio of the MGF can be quite worthwhile. Experts are predicting that if you want to buy a house worth 250,000 dollars today and have so far saved only 30,000 dollars, with a credit interest rate of 2.5 percent you would need to save another 400 dollars for another seven years, for a total credit of 75,000 Save dollars. At the same time, the basic rent must be taken into account in the calculation.
The MGF assumes a monthly rent of 800 dollars.
With this calculation the inflation is still ignored. With an annual increase in real estate prices of 1.5 percent, the client would have to save 9 years in the example, until 30 percent of 286,000 dollars are saved. After the nine years, the financing would then be possible with 30 per cent equity and a loan of 220,000 dollars, which also includes incidental acquisition costs.
MGF calculates: If the loan is taken out immediately and at the current price level, the borrower has the acquisition-related costs (€ 17,500) and further equity capital of € 12,500. He therefore needs a loan of 237,500 dollars, which is 17,500 dollars more than what was required nine years later under the aforementioned conditions.
The MGF assumes that a quasi-full financing at an interest rate of 4.3 percent pa is available. For a annuity loan with 15 years fixed interest and an initial repayment of 1.75 percent, the monthly rate would then be 1197 dollars compared to 1200 dollars as the sum of cold rent and savings rate.
As a result, the remaining debt after nine years so at the time when 30 percent equity would have been saved to 192,000 dollars. In the financing option with more equity then the entire loan in the amount of 220,000 dollars would be open.
Banks and brokers are promoting low level of interest
Like all scenario calculations, this is also associated with uncertainties. Banks and brokers are currently promoting the low level of interest rates for the rapid implementation of construction and acquisition projects. But nobody knows how interest rates will develop in the future. It is by no means certain that they will increase permanently in the next few years. It is conceivable, for example, that the ECB must also keep German bond yields low for the next few years or even decades, because otherwise the state would collapse under its debt burden.
Those who finance without or with very little equity take risks. A considerable part of private bankruptcy in Germany concerns people who had to resell their property several years after their purchase. Regardless of whether divorce or job loss: Under changed conditions, a sale on bad terms will suddenly lead to over-indebtedness if there is no security buffer.
Another argument from banks and brokers is the inflation prophesied these days. Whether this comes and to what extent, is an open question. However, it should be expressly mentioned that there are different types of inflation. The currently “hoped-for” type is a wage price spiral in which nominal values (and therefore also loans) are valued relatively linearly. However, rising prices without the following (net) wage increases are also conceivable – a phenomenon that has been well-known in the last 15 years.
Buyers should also take a close look at the situation on the real estate market. Relevant are only regional (better: local) developments. Nationwide indices often lead to false assumptions. Those who buy in a structurally weak region with high unemployment and emigration pressure do not benefit from rising prices in Machin and Hagram “The” real estate market does not exist.
Nevertheless, there are many constellations in which a real estate financing with little equity is worthwhile. The lower the reserves, the more important the credit comparison. From a borrower’s point of view, the competitive situation with low equity real estate financing is much worse than with the heavily advertised financing with 60 percent lending outflow.