What is construction financing without equity??
If you are considering building a house, there are many questions to be answered, including the question of financing. Construction financing without any equity is when the (construction) costs incurred are covered exclusively by a loan.
Construction financing without equity – is it still possible at all??
We say: yes, but with care! Before you get down to the nitty-gritty, however, you need to take a few important precautionary measures. In the following we will list important considerations for you, if a construction is considered.
What are the advantages of financing a construction project without equity??
As you can already imagine, a significant advantage is that construction financing without equity does not require a long savings period. So you can immediately start on the plan.
Real estate is also interesting in terms of old-age provision. So if you want to start saving for your old age at a young age, full financing can be a solution. Imagine you are a recent bachelor graduate.
Usually, you will then have only a small equity capital. Here, too, full financing can be the method of choice – in order to "get into one's own four walls" and finally to be able to finance after entering professional life.
What requirements do I have to meet??
The advantages listed above initially sound very promising. Here it should be said, however, that preconditions apply to the approval of your construction financing.
Initially, there should be no liquidity problems. It should also be said that banks usually only agree to so-called 100 percent financing. If additional (construction) costs for real estate agent, notary, tax, etc. Are incurred. If the loan has to be taken over, this is referred to as 110 percent financing.
Banks only provide such 110 percent financing in very few cases, for example if they own another property or have a very high income. Otherwise you have to pay attention to the fact that you have to pay the additional costs yourself.
Since 2016, age has also played a significant role when it comes to financing without equity. While such financing was then approved until retirement age, new guidelines have applied since 2016: in any case, your loan must be paid before you retire.
In addition, it is very important that your property should be in top condition and in a top location. With a property in need of major renovation or in disrepair, the chances of a bank approving the financing are very low.
You must always expect that the banks will first check your financial situation. After all, it is in the interest of the banks not to take any risk and, moreover, to make a profit.
Basically, you can significantly increase the chance of approval by considering the following points:
- You are in a secure employment relationship (preferably permanent)
- Protection against existential risks (early retirement, illness, death)
- Regulated income
- Taking out residual debt insurance
- Choice of a suitable property (condition) in a good location
- Other old debts can be a criterion for exclusion
Before you take the plunge: these are our tips
Make absolutely sure that you save up monthly after the construction financing has been completed. This is particularly important if you are considering buying or building a property at a later date.
Once you have found the right property, make sure that you regularly contribute your own capital. The more equity that is contributed, the more secure the financing becomes.
You should definitely secure a construction financing without equity capital by insurances. With the right insurance, you can protect yourself from the financial consequences of insolvency and avoid the loss of your home in the event of an emergency.
Make use of a financing intermediary. When making big decisions like this, it's essential to seek professional advice – especially if you're young and have little knowledge of the subject.
This is how mistakes can be prevented. Professional credit brokers have their own databases in which they have stored the guidelines and interest rate calculations of a large number of providers. This allows you to determine at any time which lenders would currently grant you the loan you want and at what interest rates.
Please note that you are always exclusively liable with your entire assets. The bank will claim the remaining amount, even in case of problems. If no further funds are then available, this often leads to private insolvency.
Read the contract carefully. Here it is worthwhile to make use of someone's second, who will eventually read through the contract themselves. Often the banks have the right to demand additional security measures if no further funds are available. It is then authorized to initiate foreclosure proceedings.
So make sure you get an overview of your finances. Only take the plunge if you are sure you will always be able to service the loan on time.
These are the problems you can expect
Construction financing without equity is in most cases associated with a higher interest rate. The situation is aggravated by the ever-changing interest rate. So if you – even if unintentionally – miss an inopportune moment, then you have to expect even higher costs than already. It is not uncommon for the costs to be two to three times as high for you.
In addition, they must be aware that their debt risk will increase. If a foreclosure is initiated, they will be left with high amounts of money.
The foreclosure sale brings in a maximum of 70 to 80 percent of the actual market value. It is possible that the bank still has outstanding claims because not everything could be compensated by the foreclosure sale.
Construction financing without equity often takes much longer. This is because a lower target interest rate is imposed on them. This means that the remaining debt cannot be paid off as quickly as with other financing models. And the longer it takes to repay the loan, the longer the bank owns the property.
It is also clear that the less equity you have, the more money you have to borrow from the bank and the longer it takes to repay the loan. This can be 20 to 30 years in many cases. During this time, you are exposed to the risk of life changes.
This means that your financial situation can deteriorate, for example due to illness, divorce or unemployment. In the worst case, you can then no longer afford the monthly installments for the repayment.
Another risk that many real estate buyers underestimate is falling real estate prices in the surrounding area.
Banks take such fluctuations into account to a certain extent from the outset, but if the value of one's own property falls in line with the price level in the surrounding area, then it may no longer form a sufficient counterweight to the amount of the loan with which it was encumbered.
The consequence of this is that the bank requires further collateral from its customers and makes this a prerequisite for the continuation of the loan. If you have already started financing without equity, you run a higher risk that the bank will initiate foreclosure proceedings due to a lack of reserves.
Conclusion: is it worth financing a construction project without equity??
In conclusion, construction financing without equity can be a viable option for your construction project, subject to the above points.
Construction financing without equity is possible, but it is more expensive, takes longer, requires an extraordinarily good credit rating, increases the debt risk and is only feasible with a valuable property. In addition, in most cases at least enough equity capital is required to cover the incidental costs incurred.
So it is clear that if you enter into such financing without sufficient other funds, the risk increases significantly. Weigh therefore absolutely, whether this financing model is portable for you, or not. And in any case, seek expert assistance to help you with this.