Construction financing without equity capital – how should this be done?

As with so many things in life, sometimes the unexpected happens!

You are not really looking for real estate. And honestly speaking, very shortly after beeing graduated, recently starting a job and having a lack of equity capital this kind of project does not fit with your current stage of life. But then, as luck would have it, you have spotted your dream property, or you have access to real estate on favourable terms which you find very appealing for a long time.

To keep a long story short: You have to seize the opportunity!

But how does that work if your parents can´t support you with money and you also can´t provide property as a additional security?

In fact, it is perfectly realistic to carry out a complete financing together with incidental extra expenses. Besides the selling price, in case of aquisition land transfer tax, notary fees, land registry costs and in certain cases broker´s commissions have to be paid, which amount to approx. 10% – 15% of the total purchase price. As a result, the overall expenses will increase enormously.

By providing a full funding, banks take therefore a high risk because the additional purchase costs don´t have an equivalent value, and finally, they are regarded as a credit in blank. The one condition for such granting loans is a very high credit rating which is reflected in a high and sustainable income, in not having any negative credit events at the Schufa (credit investigation company) and in a property which is well located and in good condition.

Even if all those criteria are fulfilled, there a still a lot of banks which do not offer full funding because of business policy and which demand the contribution of additional purchase costs.

In such cases, there is the possibility of splitting the funding. The selling price of the property will be  funded through the desired bank, and besides, the additional purchase costs will be financed through a so-called subordinated loan provided by a specialised bank. Since the security of the loan is subordinated, as its name already suggests, the relevant bank has to bear a particularly serious risk. According to this, the bank will set a high interest rate. However, there is one benefit: Most of these credits can be replaced prematurely at any time, without any early repayment charges. This means that you enjoy a certain flexibility. At all times, you can completely repay the loan or you can use monthly liquid funds as special repayment, in order to reduce the expensive credit component as quickly as possible.

As you can see, this kind of financing allows customers, with a monthly liquidity but yet a lack of capital accumulation, the possibility to aquire soon enough their own dream property – despite insufficient equity capital.


Do you have any more questions?

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Information about the author:

Alexandra Schneider is a certified bank business administrator and she writes about up-to-date topics, for FinanzierungsExpert.