Equity for your German mortgage — how much you really need

Equity is the key to solid mortgage financing. The more of your own money you contribute, the better your conditions and the safer your financing. But how much equity is really necessary — and can you do without?

What counts as equity?

Equity is more than the money in your savings account. Banks recognise various assets as equity:

Bank balances: savings in instant-access, fixed-term and current accounts are the classic form of equity. Building-savings contracts (Bausparverträge): both the saved balance and an allocation-ready building-savings loan are recognised. Securities: shares, funds and ETFs can serve as equity, though banks often apply a safety discount of 10 to 20 percent.

Life insurance policies: the current surrender value counts as equity. Alternatively the policy can be assigned as collateral without cancelling it. Gifts: monetary gifts from parents or grandparents are fully recognised — the bank usually requires a gift confirmation. Existing land: an already paid-off plot or unencumbered property can also be contributed as security.

The rule of thumb: at least the closing costs

The golden rule: cover at least the purchase closing costs from your own pocket. In North Rhine-Westphalia these amount to roughly 8.5 to 12 percent of the purchase price — depending on whether an agent is involved. Why? Closing costs do not add to the property's value. Transfer tax, notary and land-register fees and the agent's commission do not increase the value of your property and therefore provide no security for the bank.

Better still is contributing 20 to 30 percent of the purchase price including closing costs. In this range most banks offer their most attractive interest rates, because the loan-to-value ratio stays below 80 percent.

Financing without equity — is it possible?

Yes, full financing is possible in principle. The bank finances the complete purchase price — with a 110-percent financing even including the closing costs. However, this comes at a price:

Banks charge considerably higher interest for full financing — typically 0.3 to 0.8 percentage points more than for financing with 20 percent equity. With a loan of €300,000 and a 10-year fixed period, this difference can quickly mean €15,000 to €25,000 in additional interest costs.

You also carry a higher risk: if property prices fall, the market value can drop below your remaining debt. Full financing therefore mainly suits people with very secure, above-average income who have not saved equity but can comfortably afford the higher payment.

Building up equity — practical tips

Automatic savings plans: set up a standing order that automatically transfers a fixed amount to a separate savings account at the start of each month. What leaves automatically doesn't get spent.

Building-savings contract: a Bausparvertrag combines saving with a later loan entitlement at fixed conditions. You also benefit from the employee savings allowance (up to €43 per year for single filers) and the housing construction premium (up to €70 per year).

Wohn-Riester: Riester allowances and tax advantages can be used specifically to build equity or for later repayment. Thanks to the child allowances this is especially attractive for families.

Capital-forming benefits (VL): many employers pay up to €40 per month as capital-forming benefits. Paid into a building-savings contract, this adds up to almost €3,400 over seven years — plus government subsidies.

How equity affects your interest rate

The decisive factor is the loan-to-value ratio — the relationship between loan amount and property value. Banks work with interest tiers based on this figure:

With a loan-to-value ratio up to 60 percent you usually get the best conditions. Between 60 and 80 percent the rate rises slightly. Above 80 percent it becomes noticeably more expensive, and above 90 percent you pay a significant premium.

Example: with a purchase price of €350,000 and €100,000 equity towards the price (closing costs paid additionally from your own funds), the loan amounts to €250,000 — a loan-to-value ratio of around 71 percent. If you contribute only €35,000, the loan rises to €315,000 and the ratio to 90 percent. The interest difference can be 0.3 to 0.5 percentage points — several tens of thousands of euros over the full term.