Equity

Equity - In real estate financing, equity refers to all financial resources that the buyer contributes to the purchase from their own funds, without resorting to bank loans or other forms of debt financing. This includes cash on hand, savings, building savings account balances, securities, cash values of life insurance policies, land already paid for, and construction work performed by the buyer (labor equity).

Importance of Equity for Financing

The equity ratio is one of the most important metrics in lending. Banks assess the default risk of the loan based on the ratio of equity to debt. The higher the equity ratio, the lower the risk for the bank - and the more favorable the interest rates offered.

As a rule of thumb: At least 20 to 30 percent of the purchase price should be covered by equity. The ancillary purchase costs (real estate transfer tax, notary and land registry fees, real estate agent’s commission) should be financed entirely from equity, as these costs do not represent a value eligible for a loan. In Bavaria, incidental purchase costs typically amount to 8 to 10 percent of the purchase price.

When granting loans, banks distinguish between the purchase price and the appraised value, which is generally lower than the purchase price. A loan of up to 60 percent of the mortgage lending value receives the most favorable terms (first-lien collateral). Starting at a loan-to-value ratio of 80 percent, interest rates rise noticeably, and at 90 to 100 percent, many banks charge significant interest rate premiums or refuse to grant the loan at all.

Full Financing Without Equity

Full financing (100% financing) covers the entire purchase price with borrowed capital. 110% financing also covers the ancillary purchase costs. Such financing is generally possible, but requires an above-average high and stable income, an impeccable credit history, and, as a rule, a property with stable value in a good location.

The risks of full financing are significant: The monthly payment is significantly higher, the interest terms are less favorable, and if the property loses value, a negative equity position can arise-the borrower then owes more than the property is worth. We advise against full financing, especially during market phases with uncertain price trends.

Building Equity Strategically

Those who do not yet have sufficient equity should begin building it systematically as early as possible. Proven tools:

• Building savings contract: Low-cost savings phase, fixed loan interest rate - particularly attractive during periods of low interest rates as an interest rate hedging tool
• Capital-forming benefits (VL): Employer contribution of up to €40/month, government employee savings allowance for low-income earners
• ETF savings plan: Higher return potential, but price risk - suitable for an investment horizon of at least 5-7 years
• Gifts: Parents and grandparents can each gift €400,000 per child and parent every ten years tax-free - an important component of equity in practice

Practical Tip for Nuremberg and the Metropolitan Region

Given current real estate prices in the Nuremberg metropolitan area, the recommended equity ratio of 20 to 30 percent for a €350,000 condominium translates to an equity requirement of €70,000 to €105,000 - plus closing costs of around €30,000. Overall, buyers should therefore have at least €100,000 in equity before they seriously begin their search. In Erlangen and Fürth, entry-level prices for comparable properties are often slightly lower than in Nuremberg, which reduces the required equity accordingly. We recommend starting to systematically build up equity early on-a period of three to five years is realistic for purchasing your first property without full financing. Please feel free to contact us if you would like to assess your financial situation.

Frequently Asked Questions

How much equity do I need to buy a property?

As a minimum, we recommend financing the total closing costs (around 8 to 10 percent of the purchase price in Bavaria) with equity-for a purchase price of €350,000, that amounts to approximately €28,000-€35,000. To qualify for favorable interest rates, you should also have at least 10 to 20 percent of the purchase price available as equity, i.e., an additional €35,000-70,000. The higher the equity ratio, the lower the monthly payment, the better the interest rate, and the more secure the financing in the event of future interest rate adjustments.

Does a property that has already been paid off count as equity?

Yes, an unencumbered property owned by the buyer is recognized by banks as a substitute for equity and increases the mortgage lending value. The same applies to a property that has already been paid for and can be used as additional collateral-even if the owner does not wish to sell it. The eligible value corresponds to the property’s mortgage lending value as determined by the bank, which is typically 10-20% below the market price, as banks tend to use conservative valuations.

What is a “muscle mortgage”?

A “muscle mortgage” refers to the homeowner’s own contributions to the construction-that is, manual labor performed by the buyer themselves instead of hiring contractors. Banks recognize such contributions as a substitute for equity but value them conservatively: As a rule, a maximum of 10 to 15 percent of the construction cost is accepted as a “muscle mortgage,” often amounting to €15,000-30,000 in practice. The prerequisite is that the work performed by the homeowner can be carried out professionally, the homeowner can demonstrate the necessary qualifications, and the planned work is listed in detail in the financing plan.

How will the current interest rate market in 2026 affect equity requirements?

Following the sharp rise in interest rates in 2022 and 2023, mortgage rates in Germany have stabilized by 2026 at a level of around 3.5 to 4.5 percent for ten-year fixed-rate terms-significantly higher than the low-interest-rate phase up to 2021, but more moderate than the peak interest rates of 2023. This interest rate level significantly increases the monthly burden compared to previous years and makes a solid equity base all the more important. With a purchase price of 400,000 euros and an 80 percent loan-to-value ratio (320,000 euro loan), a 4 percent interest rate and a 2 percent principal repayment result in a monthly payment of around 1,600 euros-plus utilities and non-financed closing costs. Those who contribute additional equity and reduce the financing portion to 70 percent not only improve the interest rate but also lower the monthly payment to around 1,400 euros. In the Nuremberg metropolitan region, given current interest rates, we recommend an equity ratio of at least 25 to 30 percent to ensure sustainable and future-proof financing.

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