Securing construction financing: Strategies for amassing the initial down payment
Rolling Out the Red Carpet for Your Stockpile: Smart Moves to Combine Your Portfolio with Property Financing
Ever thought about tapping into your stockpile to fund your dream house? While liquidating may seem like an option, it's not always your best bet. Let's explore creative methods to incorporate your securities portfolio into property financing.
When it comes to managing a securities portfolio, the long game is usually the goal. Often, it serves as a retirement nest egg. But when property shopping comes into play, the question buzzing in your head might be: Should I sell my stocks to get equity, or are there smarter ways to make them dance with my property financing steps?
Stocks, particularly appealing in periods of low savings interest rates, promise investors long-term returns often surpassing interest on time or fixed deposits. Realistic returns from a well-diversified portfolio can range from 6% to 8%, albeit not guaranteed, and the investment is always riddled with risk – no one can predict the upward or downward trajectory of stock prices.
Put the Bank in the Loop About Your Stash
"A performing portfolio is every investor's pride, and it's understandable you'd rather leave it untouched," shares Thomas Saar, an expert in real estate financing at financial services provider Dr. Klein. "But that doesn't always have to be the case. You can utilize it for a construction project without selling shares. However, not all banks and portfolios facilitate this."
In principle, a securities portfolio can be integrated into the financing concept as security, both actively and passively. Real estate buyers should always keep their bank in the loop about their portfolio, advises Dirk Eilinghoff, a real estate and interest rate expert at consumer advice portal Finanztip – even if you don't plan to use it. "This raises the customer's creditworthiness, potentially paving the way for better loan terms."
Savings on Portfolio Value are Inevitable
"The ins and outs of securities portfolios may not be every bank's forte," underlines Thomas Saar. "Less known is that a securities portfolio can be temporarily transferred to the bank as security to secure better financing conditions. For instance, it can be pledged to the bank to enable customers to benefit from the portfolio's price gains and dividends. However, a well-filled, diversified portfolio is often needed for acceptance."
Here's the twist: banks typically don't recognize the full value of the portfolio as security, instead applying discounts. "Because the price development of securities is unpredictable, discounts of 40 to 50 percent should be anticipated," says Thomas Saar. "So, for a portfolio valued at 100,000 euros, only 50,000 to 60,000 euros may be recognized as security, depending on the portfolio structure."
Negotiating Skills are Your Secret Weapon
The portfolio can also be actively employed to repay the construction loan. "For example, the customer can use dividends for financing or clear the remaining debt with the portfolio value after 10 or 20 years," explains Thomas Saar.
While banks may not actively approach customers with this offer, negotiating is key. "Banks don't always adopt a customer-centric approach, so you have to strategize," says Thomas Saar.
Banks Favor Different Deposit Approaches
The Art of Deposit Manipulation. "Some banks secure all access rights to prevent customers from making changes," reveals Thomas Saar. "Others want customers to cede all or part of the deposit to them as collateral. And others let it carry on as is. Ideally, the customer would like to keep the deposit intact. However, each case must be dealt with individually with the bank."
A Step-by-Step Guide to Homeownership. It may happen that the bank is less than receptive to your request. "Introducing a deposit into a classic construction loan is unusual in retail banking," explains Dirk Eilinghoff. "Nevertheless, customers can still utilize their deposit by liquidating it and employing the proceeds as equity for their financing. This is a common approach in an era where homeownership seems daunting."
Taxes creep into the picture
Regardless of how you liquidate your deposit, taxes might rear their head. "Up to 27.99% of profits can be withheld as capital gains tax, including solidarity surcharge and church tax," advises Thomas Saar. "Especially in the context of a construction loan, this is a burden investors want to sidestep."
Source: ntv.de, Katja Fischer, dpa
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- For those looking to leverage their securities portfolio to fund a real-estate purchase, it's crucial to communicate the value of their portfolio to the bank, as a well-diversified portfolio can potentially improve loan terms and creditworthiness.
- When considering the use of a securities portfolio as security for property financing, investors should be aware that banks typically apply discounts to portfolio values, with discounts of 40 to 50 percent being common.
