Buying a home saves you money

How To Save Money On Home Buying

Many young families and couples want to buy a house or a condo. Very often they need to take out a loan for this dream. With more equity, banks grant more favorable loan terms. But what to do if there is not enough equity available? Here you can find out how you can save for home buying and which investments make sense for it. The purchase of a property is often in the immediate future, so an investment is necessary that fluctuates little and does not have high fees.

Buying a house without equity, is that possible?

There is a rule of thumb that says: At least 20% - 25% of the purchase price including all fees is expected as equity. Why? Then lending is no longer so risky for the bank. Should house prices fall or the borrower no longer be able to service the loan, the property can still be sold without any losses to the bank. In this case, the borrower's equity is of course gone.

Every loan is a lever for your return. You benefit from the increase in value of the property from the time of purchase. However, the leverage can also increase the losses.

The borrowers themselves have advantages if they have sufficient equity: their negotiating position with the bank is better. You can cheaper interest rates or a higher special repayment of the loan negotiate.

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How best to save for home buying?

First of all, it is important that you get an idea of how much equity is necessary for purchasing property in your area. If a house costs an average of EUR 500,000 - with ancillary costs EUR 550,000 - there should be at least EUR 110,000 in equity.

Then the question arises: When do you want to buy this house or apartment? If you have 7 years left, you would have to save around 16,000 euros per year by then. Perhaps by then the house or apartment will be more expensive than it is now. I can only recommend building up the necessary equity first. First, it makes more mathematical sense: the bank charges much higher interest rates with less equity, that adds up! But also emotionally: a high and expensive loan is very stressful for a young family. In addition, there is the obligation that both parents have to work full-time and thus have less time for children, hobbies and for themselves.

When saving, it is necessary to refrain from consuming for many years. However, if you have a goal like your dream home in mind, that might work better. A savings challenge like this helps me a lot in reaching a goal in the future.

The right investment for equity

If you want to buy the property in 7 years or less, you need an investment that fluctuates as little as possible and still costs few fees. A daily money account or a fixed deposit account * within the German deposit insurance scheme of 100,000 euros per saver and institution makes sense in this case. It is no secret that this form of investment hardly promises any interest.

If you have amounts greater than the 100,000 euros per saver, the purchase is a short or medium term one Government bond of a statehighest credit rating (AAA, AA +) and a maximum remaining term of 3 years is recommended. Alternatively, you could also set up call money and fixed-term accounts up to deposit protection with several institutions.

With an overnight or fixed-term deposit account, you grant a company, in this case the bank, a loan. So you're taking a risk: what happens if the bank goes bankrupt? The state guarantees the money until the deposit insurance has been granted. For amounts larger than the deposit guarantee, the safest way is to lend the money directly to the state. In fact, no state with the highest creditworthiness has so far been insolvent. The interest for this is of course very low or partially negative.

To get a little more return, you might consider maximum 25%invest in an ETF. A Investment on the stock exchange is much more lucrative, but subject to severe fluctuations in value. All shares should be sold no later than 2 years before purchase.

Building society savings contracts are not advisable consumer tests have shown that. In the savings phase, home loan and savings contracts almost always offer less interest than a conventional overnight or fixed-term deposit account. The interest rates on lending are also often higher than usual on the market. In addition, fees are charged at the time of conclusion, which are not included in the interest information in the sales brochures.

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Alternatives to owning a home for wealth accumulation

Though the myth is widespread, buying a home isn't always the best way to build wealth. Renting, saving and investing in the stock market is often more successful. Especially when the house price is unreasonably high.

A few years ago I discovered the book “Buying or Renting” by Gerd Kommer * and I'm really looking forward to it. It helped me a lot to find the right decision for us on the subject.

From buyer to convinced tenant

When I started saving for a house at a young age, I put most of my money into actively managed equity funds. I didn't know that this type of investment is more suitable for an investment horizon of 15 years or more.

In retrospect, that was a good idea. (although an investment in a passive ETF would have been cheaper). But with what I know today, I can only say: Nobody knows how the stock prices will change in the next few years develop. It can only be certain that they will fluctuate greatly. With what I know today, I would prefer to play it safe with an investment horizon of just a few years.

Thanks to my “all-in-share” strategy at the time, I was able to take the high returns with me and use the compound interest effect. Inflation averaging 2% a year has not made my capital more worthless.

It makes sense, especially for young investors, to start investing on the stock exchange early. Such a fortune can be built up over a long term. If the money stays in the daily or fixed deposit account, it will decrease every year due to inflation.

Nevertheless, today I remain a convinced tenant of a pretty semi-detached house with a garden and do not use my investment on the stock market as equity to buy a house. Because with my husband and two children, I now live in a city with extremely high house prices compared to rent. Ten years ago, when I was saving for my dream house, I couldn't tell where I would live now. Buying a house here and now would mean for our family that we would have to service a large loan for 20 years and then probably have less money than tenants. Money can also buy time that we can now spend with the children and with each other instead of paying the loan.

Nobody can know what plans we will have in 10 years and where we will live. It would be a shame if the time is not used for high-yield investments.

For us, I don't want to rule out the possibility of buying a property at some point. But only if the purchase price is more attractive compared to rent than where I live.

Conclusion:

Banks expect the borrower to bring in at least 20% - 25% of the total purchase price including ancillary costs as equity. Then more favorable credit conditions are also possible. If you are planning to buy a house in the immediate future, you should invest the equity with as little fluctuation as possible and with low fees. This is possible, for example, with a call money or fixed-term deposit account. If you have more money than the 100,000 euros that are secured by the German state, for example, government bonds with the highest creditworthiness and short to medium term and a maximum of 3 years remaining term are the first choice. You could invest a maximum of 25% of your capital in the form of an ETF. However, the investment should be sold two years before the purchase. A significant return above inflation is unthinkable.

If your investment horizon is significantly longer, at least 15 years, an investment on the stock exchange is a very good alternative for building up wealth. A fortune can also mean being able to afford more time for one's own family and not being burdened by high credit.

Owning a house is first and foremost an emotional decision. Because such a house has a significant influence on the lifestyle. A house with a garden is also available for rent, which will also create beautiful childhood memories.

How are you currently investing your money? Are you also saving for a house? I am very happy about your comment.