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Are you planning to buy a flat using a mortgage loan? The bank will require your own financial contribution. See how much of the purchase price you will have to pay from your cash and what to do if you do not have enough savings.
For several years, making own contribution to the purchase or construction of real estate has become mandatory. The times when banks have credited a hundred or even more percentage of the value of a home have gone forever. Following the guidelines of the Polish financial market supervisor, the banks tightened their lending policies and from 2013 they started to require the borrower’s increasing share in the financed transaction.
What is the own contribution?
The own contribution is a part of the price or financial expenses incurred in connection with the purchase or construction of real estate, which is not financed by the bank. This means that it must be contributed by the investor. The ratio of the loan taken to the value of the property constituting the transaction security is illustrated by the LTV ratio (Loan to Value). At present, the maximum level of this indicator can be 80%. This means that the own contribution to the mortgage must be 20%. It results from Recommendation S issued by the Polish Financial Supervision Authority.
The recommendation is not a universally binding normative act but a document of the so-called soft law – a collection of good practices recommended to financial institutions by the supervisor. Therefore, some banks require only 10% of own contribution (which implies the value of the LTV ratio at the level of 90%). This is due to the fact that the remaining 10% is insured by the bank under the so-called insurance of low own contribution. The client pays for insurance. Depending on the bank, it is being paid monthly – as an additional amount added to the loan installment, or in advance for a specific period of time. The premium for this insurance is payable until the outstanding loan capital drops below 80% of the property value taken during the credit analysis. Some banks use bail instead of insurance in the form of cash locks on the account or other individual forms of collateral.
What could be an own contribution?
In the case of a loan for the purchase of an apartment or house, the own contribution will be cash, which will be paid to the seller from the buyer’s funds. Importantly, this money cannot come directly from another loan. If the applicant builds a house, the bank will accept the land on which the construction takes place, already undertaken works, and – in some cases – documented purchase of building materials.
What to do if you don`t have cash for the own contribution?
Then, the LTV ratio used to calculate the own contribution can be raised by presenting additional property as a collateral, which is at least 10% more worth than the amount of the loan taken (applying for a loan from banks that accept a 10% own contribution).
However, if you do not have a property of a correspondingly higher value, but you have another one, which is worth less, you can present for collateral the purchased and already possessed real estate. Then their values add up and the LTV ratio can reach the level accepted by the bank.
These are just some of the known ways to present an own contribution. In order to choose an individual strategy for getting a mortgage, contact us for a free consultation.
