20 Percent equity: tightening on real estate lending approaches

20 Percent equity: tightening on real estate lending approaches

In Germany, there are signs of a tightening in the granting of real estate loans. Federal government plans to raise minimum equity requirements for borrowers. In concrete terms, at least 20 percent of the purchase price will have to be contributed as equity in the future. It means that in the future borrowers will have to bring more financial resources to get approved for a real estate loan.

The plan is welcomed by experts as it can help reduce the risk of a real estate bubble and a simultaneous overheating of the market. Recently, banks in Germany had increasingly granted real estate loans, even without sufficient equity capital of the customers. The result could be payment difficulties and losses, even foreclosures.

The new rule is also intended to help ensure that more consumers have long-term financial security. After all, if you don’t put enough equity into your loan, you run the risk of not being able to make the monthly payments and getting into financial trouble. The planned regulation is therefore an important protective mechanism for consumers, which can have a positive effect on financial stability in Germany.

It remains to be seen if and when the new regulation will come into force. Until then, real estate buyers and potential builders should already inform themselves about their financing options and, if necessary, build up reserves to meet the increased equity requirements.

Changes in the granting of real estate loans

The year 2021 will bring changes in the granting of real estate loans. A tightening is getting closer that matters to buyers and builders. From next year, they will have to show at least 20 percent equity for a property in order to obtain a loan for it. A high hurdle for many people who do not want to give up the dream of owning their own home.

20 Percent equity: tightening on real estate lending approaches

But what does this tightening mean for the market?? On the one hand, it will mean that many people who previously received a loan for their property will no longer be able to obtain it in the future. On the other hand, it will lead to a decrease in purchasing power and a slower real estate market.

For banks, on the other hand, the tightening means more security. This is because the higher a customer’s equity, the lower the risk of default for the bank. This means that banks will favor certain customers and exclude others from the outset.

  • Fewer loans for real estate
  • Declining purchasing power
  • Slower real estate market
  • More security for banks

It remains to be seen how the tightening will affect the market. One fact is certain, however: for many people it will become more difficult to get a loan for their dream property.

Why is the granting of real estate loans being tightened??

Residential real estate is considered a stable investment in Germany and is very popular with investors. This popularity has led to a real estate boom in recent years, which has led to inflated prices and high demand for real estate loans. Legislation requires that, in order to prevent financial crises in the future, a higher level of equity must be contributed when real estate loans are granted.

The tightening in the granting of real estate loans is getting ever closer, with the minimum amount of equity required to rise to up to 20 percent. This requirement would mean that in the future significantly more equity must be included in the financing of real estate projects. For many investors, this could mean having to resort to another investment product.

The higher requirements for real estate lending are intended to help increase the stability of the financial market and avoid financial crises if necessary. In addition, the tightening is intended to help prevent future real estate bubbles, as a higher equity ratio reduces the pressure on the real estate market and thus also reduces the risk that excessive prices will be paid for properties.

  • Conclusion: The stricter requirements for granting real estate loans are an important step toward reducing the potential instability of the financial market. However, the tightening will also lead to many investors having to look for alternative investment products, as a higher equity ratio will be required when financing real estate.

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