Published 09.07.2024

How much self-financing is reasonable when applying for a home loan?

How much self-financing is reasonable when applying for a home loan?

It is widely believed that when applying for a home loan, it is wise to negotiate the lowest possible self-financing amount. However, some homebuyers see a larger down payment as a profitable opportunity to invest their spare money.

“Buying a home involves single outlays like the contract fee, notary fees and state fees in addition to self-financing, as well as renovation costs,” explained Mari-Liis Sepp, Head of the Loan Department at Holm Bank.

“When funds are scarce, the smallest possible down payment is understandably the only option. However, if you have substantial savings, a larger down payment can be a smart way to grow your wealth,” she added.

Affordable repayments

According to her, the most immediate effect of a higher down payment is that the homebuyer will have to borrow less, and therefore will have lower monthly repayments.

“The rising Euribor over the past few years has shown homeowners just how much an interest rate hike can affect their monthly living costs. The combination of a larger self-financing share and a smaller loan amount results in a lower monthly loan repayment, serving as an effective insurance against such fluctuations,” she explained.

The second and more important reason is that if a homeowner who has made a larger down payment and taken out a smaller loan sells this property later, they will have more money left over to buy and furnish their new home.

“If you compare today’s price levels with those five years ago, the median transaction prices have increased by nearly 50%, and there are regions where real estate prices have even doubled. For instance, if a homeowner who bought an apartment for €150,000 in 2019, with €45,000 of that provided as a down payment, manages to sell this property now for €250,000, they will have more than €150,000 left over for future investments after paying off the balance of the loan,” Sepp said as an example.

Real estate is always in demand

“The stabilisation of inflation, the decreasing Euribor and the economic recovery will boost consumption again,” said Mari-Liis Sepp. “This could go hand in hand with a revival of the real estate market. In general, money invested in real estate increases in value over the years, unlike money sitting in a bank account, as it is likely to depreciate due to inflation and spontaneous consumption.”

According to her, putting money into real estate has been the preferred investment method for many people, as it is considered safer than trading on the stock market. “It can be said that, from a security perspective, real estate investments are rated as highly as deposits. While the last year has been a triumph for clients with deposits due to the rising interest rates, real estate investors have enjoyed good returns on their investments for longer. You should always consider the different options available to you, and consult specialists who can point out the pros and cons of each solution,” the Holm Bank expert advised.

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