Financing real estate without equity or savings: Is it possible?

In the swirling world of real estate, it is often assumed that significant equity is essential to get your dream home or investment property. But in today's ever-changing financial landscape, several methods have emerged that challenge this assumption.

Why Banks Require an Own Contribution

The main reason why banks and other traditional lenders require equity is to reduce risk. If the borrower defaults on his/her obligations, the financial institution could sell the property and recover its loss. With an equity stake, the borrower has more to lose, making him/her more likely to meet his/her loan obligations.

It also boils down to the fact that when you invest with your own money, it is proof of your financial commitment and stability. Moreover, it is seen as a sign that you are more likely to be responsible and prudent in managing the property and the loan.

Loan lenders are sometimes allowed to give a mortgage without input from the borrower, but have to substantiate it properly. The requirements are:

• Minimum €2000 net income individually, €3500 for couples.
• After living expenses, €1500 (or €2000 for couples) should remain.
• The new house should not be above EPC value D.
• Loan up to 40% of your salary is allowed.
• You can borrow up to €325 000.

It used to be easier to borrow without savings. Since 2020, the National Bank says you can borrow a maximum of 90% and have to contribute 10% yourself.

Fluctuations in the Percentage of Own Contribution

Over the years, the percentage of equity required has fluctuated somewhat, depending on various economic factors. After the 2008 financial crisis, for instance, lending standards became significantly stricter, and we saw lenders demanding higher equity contributions to protect themselves against potential defaults.

In more recent years, with the low interest rate environment and strong property market in many regions, some lenders have relaxed their requirements somewhat, but the principle of substantial equity has mostly been retained.

Situations where Lack of Ownership Occurs

There are numerous reasons why potential buyers or investors cannot raise the required equity:

1. First-time buyers: Many first-time homebuyers have not had enough time or resources to save enough.
2. Unexpected Expenses: Large, unexpected expenses such as medical emergencies, divorce or job loss can affect savings.
3. Recent Major Purchases: Like the example of the couple who bought a new car just before their dream home became available.
4. Entrepreneurs and the self-employed: Like the IT entrepreneur in our case study, some individuals may choose to reinvest their capital in their business, leaving less cash available for property purchases.

How much can you borrow? Is an all-in loan feasible?

When applying for a home loan, the rate plays a crucial role. This is the ratio between the amount you want to borrow and the value of the house. The quotity is determined by dividing the loan amount by the house value, then multiplied by 100 to express it as a percentage.

Example:

Credit amount x 100 = quotity in percentage Property value

So, if you want to borrow €250,000 for a €300,000 house, your quote is:

250,000/300,000 x 100 = 83%

The rule is that a quota up to 90% is allowed.

Under guidance from the National Bank of Belgium, banks often set a limit of 90% quotity. This means you have to pay 10% of the home value yourself. Sometimes even 20% equity is expected.

However, this does not mean that buyers without savings cannot get a loan. The 90% rule is based on the bank's total mortgage portfolio. While exceptions are possible, they are rare. For example, see how Davy got "all-in" financing without any of his own money.

Banks are allowed to grant up to 35% of their total loan amount to loans with a quota above 90%. Within that 35%, only 5% of loans are allowed to have a quota above 100%.

So:

Of every 100 mortgages, 35 are allowed to have a quota above 90%. Of those 35, only about 2 (5%) are allowed to have a quota above 100%. While an "all-in" loan with no savings can be challenging, it is not unfeasible.

Alternative Financing Routes

Read more about the financing options to provide sufficient equity to be obtained for a property purchase.

1. Partnerships and alliances: Pooling resources with a partner can reduce financial strain. Whether you partner with a business partner, friend or family member, sharing the financial burden can open the door to property ownership. Want to know more?
2. Private Lenders and Investors: Outside traditional banks, there are private lenders willing to invest in real estate projects. Their flexibility can be advantageous, but it is essential to consider the terms carefully.
3. Immotokens Co-purchase Option: Perhaps the most innovative option on the list. Immotokens provides a platform where buyers and investors come together. If your own contribution falls short, Immotokens can match an investor willing to participate in your real estate project. This allows you to invest faster and with more flexible terms than traditional financing methods. See how the Immotokens co-buy formula works.

Conclusion

While the conventional path of property finance has its merits, it is clear that there are alternatives for those who cannot afford traditional equity. By choosing the right strategy, you can accelerate the path to property ownership even without significant equity.

Wondering how these alternative methods compare to a conventional mortgage? Find out more in our article on "Guide to getting a loan for your own effort in property finance“.