How much equity do I really need?

The widespread rule of thumb of “20 percent equity” is a good guide but not a fixed limit. What matters is not contributing as much as possible, but finding the right balance between interest rate, instalment and security for your situation.

Additional purchase costs out of your own pocket

Ideally you cover the additional purchase costs yourself, i.e. real estate transfer tax and notary, and possibly the estate agent’s commission as well. In Lower Saxony that is a good 10 percent of the purchase price. They are hard to finance along with the loan because they do not create any value that the bank can lend against (colloquially: “see as security”).

For a purchase in Hannover or the surrounding area, the calculation looks like this. Real estate transfer tax in Lower Saxony is 5 percent of the purchase price. Notary and land registry together come to around 1.5 to 2 percent. If an estate agent is involved, buyer and seller have usually split the commission in half since 2020, so the buyer often pays just under 3 to 3.6 percent including VAT.

What counts as equity?

Equity is more than the balance in your savings account. Banks also accept securities portfolios (usually with a safety haircut), building savings balances that are ready for allocation, surrender values of life insurance policies, and gifts or private loans from the family. A plot of land that has already been paid for and is unencumbered also acts like equity for a new build.

Many banks also recognise your own labour on the build, often called “sweat equity”, to a limited extent. Only work that you can actually manage professionally is realistically valued, such as painting or flooring. Planning too optimistically here risks a financing gap in the middle of the building project.

The loan-to-value ratio decides the interest rate

Banks calculate the interest rate according to the so-called loan-to-value ratio, i.e. the ratio of the loan to the value of the property. The most important thresholds are at 60, 80 and 90 percent. Staying below a threshold gets you noticeably better terms. Even a few thousand euros more equity can therefore save a disproportionate amount of interest if it lifts you over one of these thresholds.

Between financing 80 percent and financing 100 percent of the purchase price there is often an interest difference of 0.3 to 0.5 percentage points, depending on the market. Calculated on a large loan, that adds up to a five-figure sum over the years.

Worked example: the same house twice, two mortgages

A simplified example for a house with a purchase price of €400,000 and €40,000 in additional purchase costs shows how strongly equity works. Buyer A brings €40,000 and thus covers only the additional purchase costs, buyer B brings €120,000. The interest rates are assumptions for illustration; the repayment is an initial 2 percent in both cases.

Buyer B pays a good €530 less every month and almost €5,000 less interest in the first year. The effect comes from two directions at once, because the smaller loan meets the better interest rate.

A buffer beats borrowing to the limit

Putting your last savings into the financing may let you borrow more, but the first major repair then puts you under immense pressure. An emergency fund of a few months’ salary belongs on the side rather than in the down payment. Much can be achieved even with little equity. We show you honestly what makes sense in your case.

Also think about the costs that arise after moving in. Kitchen, removal, minor renovations and the first purchases quickly add up to several thousand euros. This money should be budgeted in addition to the emergency fund so that the new property brings joy rather than becoming a constant drain on the household budget.

Is it possible without any equity at all?

Financing of 100 percent of the purchase price, sometimes even including additional purchase costs, is possible with a very good credit standing and a secure income. However, it costs a considerable interest premium and requires a higher instalment, because more debt has to be repaid in the same time. It can make sense, for example, for young professionals with a very good income who have not yet had time to save but whose salary is growing reliably.

More equity, better terms

The more equity you contribute, the less the bank has to finance, and the lower the interest rate usually is. So it can be worth contributing a little more, but only as long as the buffer remains. We do this calculation together in the consultation, with your real figures instead of rules of thumb.

Building up equity deliberately

If the purchase is still two to three years away, the starting position can be actively improved. Set up a fixed savings plan into a separate account and treat your monthly savings as a dry run for the future instalment. This way your equity grows and at the same time you test whether the planned burden really works in everyday life. A conversation within the family can also be worthwhile, because a gift or an interest-free private loan has the same effect on the loan-to-value ratio as your own savings. And if you have capital-forming benefits or an older building savings contract, check when these funds become available and whether the allocation can be aligned with the time of purchase.