Raising the construction deposit: strategies for securing funds for your project
Ever thought about using your shiny stocks and bonds to buy that dream house? Here's how your portfolio can play a crucial role in your property financing journey.
If you're a proud owner of a well-curated securities portfolio, you might not fancy the idea of selling it just to get a piece of your coveted real estate pie. But did you know you can use it to finance your property, without having to dissolve it? Here are some strategies to leverage your investments in the world of bricks and mortar.
Your Secret Weapon: The Bank Needs to Know
"It's understandable that you don't wants to part ways with your stocks and bonds," says Thomas Saar, a real estate financing expert at Dr. Klein Financial Services. "Thankfully, you don't have to sell them. You can use your portfolio to fund your construction project without liquidating it, albeit not all banks and portfolios allow for this."
Your securities portfolio can be integrated into your financing strategy, either actively or passively. Dirk Eilinghoff, real estate and interest rate expert at the Finanztip advisory portal, suggests that property buyers should always inform their bank about their portfolio, even if they're not planning to use it. "This boosts the borrower's credibility with banks and could lead to better negotiations for loan terms."
No Free Lunch: Anticipate Discounts
It's key to understand that if you decide to use your securities portfolio as collateral for a loan, banks may apply discounts to its value. "Due to market uncertainty and their risk-averse nature, banks may discount your portfolio value by 40 to 50 percent," explains Thomas Saar. "For instance, a portfolio worth 100,000 euros could fetch you only 50,000 to 60,000 euros in security, depending on your portfolio's structure."
Active Partnership: Negotiating with the Big Boys
If you choose to actively use your portfolio to repay your construction loan, you'll need some financial savvy and negotiating skills. "You can use the dividends from your securities for loan repayments or redeem the remaining debt with the portfolio's value after 10 to 20 years," explains Thomas Saar. "However, this requires experience in financial matters and a knack for dealing with banks, as they don't usually approach customers with such offers—you have to initiate the discussions."
Banks: One Size Does Not Fit All
"When it comes to handling customer deposits, banks operate in various ways," says Thomas Saar. "Some banks seize all access rights to prevent clients from making changes, while others want the client to transfer the entire or partial deposit as security, and some prefer to keep the deposit as-is, but you’ll need to negotiate it individually with your bank."
A Step-by-Step Guide to Your Dream Home
If you struggle to persuade your bank to accept your securities portfolio, you can consider liquidating it and obtaining equity for your financing. This is a common method to bypass the challenges of purchasing a home.
Remember that, when you liquidate your deposit, you may face tax obligations. Depending on your country, up to 27.99% of the profits may be subject to withholding tax, including solidarity surcharge and church tax, "which investors would like to avoid, especially in the context of a mortgage," says Thomas Saar.
Sources: ntv.de, Katja Fischer, dpa
- Real Estate Financing
- Real Estate Investment
- Securities Portfolio
- Stock Market
- Bond Market
- Collateral
A Smarter Approach: Harnessing the Power of Your Securities Portfolio
- Collateral for Real Estate Loans: Securities can serve as collateral for real estate loans, potentially resulting in lower interest rates or better loan terms for investors.
- Quick Access to Capital: Liquid securities can be used quickly to make down payments or acquire property, opening up financing options like DSCR loans that evaluate rental income against debt obligations rather than personal income.
- Enhanced Credibility: A strong securities portfolio can improve an investor’s overall financial profile, making them more appealing to lenders and potentially leading to more favorable loan terms.
- Liquidity Assurance: Having a diversified securities portfolio provides a source of liquidity, signaling to lenders that you have the means to cover mortgage payments or unexpected costs.
- Risk Diversification: Combining securities and real estate investments reduces overall risk, which may lead to better financing terms due to a signal of more stable overall wealth management.
An Edge in Negotiations: Impacting Loan Terms and Banking Relationships
- Lower Interest Rates and Flexible Terms: Banks often consider an investor's overall asset strength when deciding loan terms, and collateralizing securities can result in lower interest rates or more flexible terms like longer amortization periods or lower down payments.
- Increased Borrowing Capacity: Banks may view securities as collateral, which may enable investors to secure larger loans for real estate investments.
- DSCR Loan Eligibility: DSCR loans, which focus on a property's ability to cover debt through rental income rather than personal income, may be more accessible to investors with strong securities portfolios.
- Improved Negotiations for Refinancing: A robust securities portfolio can be used to renegotiate better terms or inject equity during refinancing if market conditions necessitate changes like rising interest rates.
- Access to Specialized Financing Options: Investors with substantial securities portfolios may find themselves eligible for specialized loan products tailored for complex real estate portfolios—such as bridge financing, preferred equity raises, and agency loans.
- By informing your bank about your securities portfolio, even if you're not planning to use it, you can boost your credibility and potentially negotiate better loan terms for real estate financing.
- If you decide to use your securities portfolio as collateral for a real estate loan, banks may apply discounts to its value, potentially limiting the amount of funding you can obtain.
