Use existing property as equity?

Hello everyone,

the following idea is currently on my wife’s and my mind, and I would really appreciate an assessment from you:

About us:
Early 30s, married, 1 child, permanent employment contracts, approx. €5300 household income, approx. €2600 living expenses (excluding rent)

Financial situation:
We own a rented existing property (current market value approx. €280,000, net cold rent €700) with an outstanding loan of approx. €50,000. There is no further “liquid” equity available.

Consideration:
Due to our offspring, we need to enlarge our living situation and are considering buying a condominium. We do not have a specific property in mind yet, but in the current market, our desired property would cost approx. €500,000 plus approx. €40,000 ancillary costs.

Financing:
We would like to keep the rented apartment and use it as equity in financing the new apartment. The problem is that due to the lack of other equity, we would still have to borrow an amount of approx. €540,000. From your point of view, is it at all realistic that a bank would support such a project or would we have to sell the other property? We find it difficult to estimate what interest rate we would get with our background, which is why it is also difficult for us to assess the monthly annuity. How do you see the risk that in the event of a downturn in the real estate market, there could be additional demands for further collateral by the bank? Furthermore, the property will be fully paid off in the long term through a prospective inheritance.

We are very grateful for any assessment, tips, and recommendations!

I don't see a big problem here. In my opinion, it would make sense, also for tax reasons, to additionally mortgage the [ETW] and repay it with low installments. This is somewhat number shifting and also varies from bank to bank. This amount, for example 150,000 euros with 2% repayment, could be invested by you as equity in your home and correspondingly repaid at a higher rate. Probably every day people with significantly worse conditions conclude similar loans. There is no sign that the real estate market will collapse significantly in the future. And as long as you service the loans, the bank doesn't care much about it.

Hello,

aren't you saving any cash at all? Or has everything gone into the rented property.

Regarding the transfer to the rented property. Nice idea, but if the connection between the new and old is not convincingly explained to the tax office, it will be rejected.

Regarding the transfer to the rented property. Nice idea, but if the tax office is not convincingly explained the connection between the new and old one, it will be rejected.

The tax office can initially not forbid anyone from freely disposing of their property. One also would not have had to invest so much in this apartment until now and could have kept the money in reserve. The limit is actually always §42 AO, i.e., abuse of arrangements. But this only applies if there is no other comprehensible reason for this transaction—which is not the case here. Also popular in this context is the so-called spouse swing. One partner sells their share to the other, let’s again take the example of 150,000 euros, and takes out a mortgage for it. Common practice, completely legal, and the tax office can do little about it.

We own a rented existing property (current market value approx. €280,000, net cold rent €700) with an outstanding debt of approx. €50,000. No further "liquid" equity is available.

Liquid assets are those that can flow and be transferred from A to B. Real estate does not count.

The tax office cannot initially prohibit anyone from freely disposing of their property. After all, one didn’t have to invest so much in this apartment up to now and could have kept the money stashed away. The limit is actually always § 42 AO, i.e. abusive structuring. But this only applies if there is no other plausible reason for this transaction—which is not the case here. Popular in this context is also the so-called spousal swing. One partner sells their share to the other, let’s take the example with 150,000 euros again, and takes out a mortgage for it. Common practice, completely legal, and the tax office can do little about it.

It depends on the use of the money. If you mortgage the rented apartment to get a better interest rate from the bank and use this money to build your private house, then that is also your private pleasure, because the costs (interest) are not used for acquiring, securing, and maintaining income.
If you mortgage the apartment to purchase another property which is rented out, then the costs can be claimed as advertising expenses because the money is used to pay for a property that generates income.

Regards