Equity ratio

Equity Ratio - The equity ratio refers to the percentage of the total purchase price of a property that is covered by the buyer’s own funds and is one of the most important factors determining the terms and affordability of a mortgage.

What does the equity ratio mean in real estate financing?

When purchasing a property, financing consists of two components: the equity that the buyer contributes themselves and the debt in the form of a bank loan. The equity ratio indicates how high the self-financed portion is in relation to the purchase price. With a purchase price of 400,000 euros and 100,000 euros in equity, the equity ratio is 25 percent.

Banks generally recommend an equity ratio of at least 20 to 30 percent of the purchase price. A key reason lies in the so-called loan-to-value ratio: The bank values the property with a safety margin and generally finances only up to 80 percent of this mortgage lending value. The higher the equity ratio, the lower the loan-to-value ratio, and the lower the default risk for the bank. In return, banks reward a high equity ratio with significantly better interest rates. The difference between 90-percent financing and 70-percent financing can quickly amount to 0.3 to 0.5 percentage points in interest rates, which translates to savings of tens of thousands of euros over the entire term.

A key principle is: Incidental purchase costs should always be financed from equity. These include real estate transfer tax (3.5 percent in Bavaria), notary and land registry fees (about 1.5 to 2 percent), as well as any real estate agent’s commission. These incidental costs do not increase the value of the property and are therefore not recognized by banks as eligible for financing. In total, closing costs in Bavaria amount to 6 to 10 percent of the purchase price, depending on the specific circumstances.

100-percent financing (full financing) is generally possible, but is only granted to borrowers with above-average creditworthiness, a secure and high income, and a property with significant value. The interest rate premiums are substantial, and the risk of over-indebtedness rises significantly if real estate prices fall. 110% financing, in which the incidental purchase costs are also financed, represents the riskiest option and is offered by only a few banks.

Equity Ratio and Interest Terms - Guideline Values (2024)

Equity Ratio	Loan-to-Value Ratio	Typical Interest Premium	Example: Purchase Price €350,000
≥ 40% (€140,000 equity)	≤ 60%	Best terms (0.00%)	Equity €140,000, Loan €210,000
30% (€105,000 equity)	≤ 70%	+0.15-0.25%	Equity €105,000, Loan €245,000
20% (€70,000 equity)	≤ 80%	+0.30-0.40%	Equity €70,000, loan €280,000
10% (€35,000 equity)	≤ 90%	+0.60-0.80%	Equity €35,000, Loan €315,000
0% (Full financing)	100%	+1.00-1.50%	Loan €350,000 + incidental costs

Note: The loan-to-value ratio refers to the mortgage lending value determined by the bank, which is typically 5-15% below the purchase price. In Bavaria: Real estate transfer tax 3.5% + notary/land registry fees approx. 1.5-2% = approx. 5-6% in incidental purchase costs excluding real estate agent fees.

Building and Properly Utilizing Equity

In addition to cash balances in savings and checking accounts, equity includes home savings contracts, securities accounts, cash values of life insurance policies, as well as gifts and inheritances. An existing, unencumbered piece of land or a condominium can also be contributed as equity toward the financing, as the bank takes these assets into account when determining the mortgage lending value.

We recommend not contributing all available capital toward the financing. A reserve of three to six months’ salary should be retained for unforeseen expenses such as repairs or short-term loss of income. The equity ratio should therefore always be considered in the context of your overall financial situation.

Practical Tip for Buyers in Nuremberg and Franconia

In the Nuremberg metropolitan area, average purchase prices for existing apartments range between 2,500 and 4,500 euros per square meter, depending on the location. For an 80-square-meter apartment priced at 320,000 euros, buyers should budget for at least 64,000 to 96,000 euros in equity plus closing costs of around 20,000 to 25,000 euros. The comparatively low real estate transfer tax rate in Bavaria of 3.5 percent is a locational advantage over other federal states.

We recommend that buyers in Nuremberg, Fürth, and Erlangen obtain offers from several banks and savings banks and specifically compare the interest rate differences across various equity ratios. Even an increase in equity of just a few thousand euros can result in reaching the next lower loan-to-value tier, leading to a significant improvement in interest rates. Our network of experts assists in structuring the optimal financing plan.

Frequently Asked Questions

What is the minimum amount of equity I need?

As a rule of thumb, we recommend financing at least 20 to 30 percent of the purchase price plus the full amount of closing costs with equity. In Bavaria, this means that for a purchase price of 300,000 euros, you’ll need at least 80,000 to 110,000 euros in equity. The higher the equity share, the better the interest rates and the lower the financial risk.

Does full financing without equity make sense?

100% financing is possible, but it carries significant risks. Interest rates are significantly higher, monthly payments increase, and a decline in property values could lead to excessive debt. We recommend full financing only for those with very high and stable income who can also make additional payments quickly.

Do personal contributions to construction count as equity?

Yes, many banks recognize so-called “sweat equity” as a substitute for equity. Typically, personal contributions are credited at up to 15 percent of the construction or renovation costs. The prerequisite is that the work is performed professionally and the bank realistically assesses the value of the personal contribution. Painting, flooring installation, and landscaping are most commonly accepted.

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