Rented apartment as a substitute for equity capital

Hello! As expected here in the forum, we want to buy a property. It is about an apartment worth 250 TEUR. As starting capital, we have just about the additional costs (notary, land register, tax, no broker) saved up and a building savings contract that is actually aimed at a savings sum of 50 TEUR but has only accumulated 5 TEUR so far. Can and should it be canceled or would that cause a big loss? It doesn’t have the best conditions anyway, so I don’t want to hold on to it. The important question is the following: I have an unencumbered condominium with a market value of about 70 TEUR. I would like to keep it, especially since it is rented out. Can I use a land charge here as a substitute for equity, or am I forced to make a cash purchase? Regards!

If the new apartment is worth 250k, why risk another 70k?

You cannot really use it as "equity replacement" in the narrow sense (because you don't have any cash from it), but you can state the cold rent (minus deductions) as additional income and use the additional mortgage to reduce the interest rate for the financing.

If the new apartment is worth 250k, why risk another 70k?

I don't understand. Because otherwise I hardly have any equity.

...reduce the interest rate for the financing with the additional land charge.

And does that bring a lot? Would a land charge in the full amount (70 thousand EUR) be advisable then?

Hello Hendrik,

a land charge [Grundschuld] for the full amount would make little sense and you probably won’t get it either; rather, the bank would assess the apartment and include up to the so-called lending value [Beleihungswert] in the financing.

Existing property can of course help you since the bank will pursue the entire assets anyway in case of doubt. However, the fundamental question is whether you can manage financing that moves around 100%.

The new apartment would also be financed by the bank up to the lending value at most – let’s assume that it is 70% of the purchase/market value for the financing bank in both cases.

That would be €175K and €52.5K – but together that does not equal the purchase price of €250K.

That would only be the case from a lending value of ~80%, which would certainly be the limit. If then your income (including rental income from the existing apartment) can barely cover the associated loan, you will likely be rejected.

However, if your income is so high that you could finance the remaining amount of about €75K (neglecting the building savings contract with €5K, that won’t make a difference in the end) for example also through pure consumer loans, then it would look different.

The question is therefore also how high your income from work is.

If this, including the rental income, is too low to finance the new apartment, you might (and have to) possibly part with the apartment, then bring in the “missing” €70K for the financing of the new apartment and would have to manage the loan of about €175K without the rental income.

Another alternative: wait a certain time and save more equity. Depending on the region and condition of the rental apartment, this can be quite plausible.

In the end, you should visit three or four banks and present your situation; then you will quickly get a feeling for where you stand. Don’t bury your head in the sand if it doesn’t work out at all – some banks reject certain risks, while the next one is exactly looking for such constellations.

Best regards
Dirk Grafe