Down payment - how much you need

What is a down payment and why is it required?

A down payment is your share in financing the purchase of a property. The bank usually does not finance the entire value of the flat - it expects you to cover part of it yourself. This limits its own risk, because the loan is lower than the value of the collateral.

From the borrower's perspective, a down payment is also a signal of the ability to save and greater security. A lower loan means a lower instalment and smaller total interest costs over the whole repayment period.

How much is the required down payment?

The size of the required down payment depends on the bank's policy and supervisory recommendations on the loan-to-value ratio. In practice, banks usually expect a down payment of roughly around 10-20% of the property's value. You will learn the specific threshold at your chosen bank.

Minimum versus optimal down payment

The minimum down payment is the lowest accepted value at which the bank will grant a loan at all. The optimal down payment is usually higher, because it improves the terms of the offer. It pays to consider whether to set aside a bit more, if that allows a significantly lower margin or the avoidance of additional costs.

What does the bank count as a down payment?

Most often the down payment is cash, but banks also accept other forms, depending on the situation.

• Cash and savings: the simplest and most commonly accepted form of down payment.
• Building plot: when building a house, the value of a plot you own can be counted as a down payment.
• Funds from other sources: for example a gift from family, provided it is properly documented.

Exactly what the bank will count towards the down payment depends on its internal rules. That is why it pays to ask in advance, especially when you plan to use something other than cash.

How does the down payment affect the loan terms?

The size of the down payment translates into the loan-to-value ratio, and that affects the bank's risk assessment. The table below shows the general relationship.

It is worth remembering that a higher down payment means not only better terms, but also a lower loan amount, and so smaller total costs. It is one of the simplest ways to reduce the total cost of a mortgage-financed purchase.

What to do when you are short of a down payment?

If you do not yet have the required down payment, you have several options. The safest is to keep saving and postpone the purchase. Another solution can be a gift from close family, which must be properly documented and settled for tax.

Support programmes and solutions that partly replace a down payment also appear on the market, but their availability and terms can be variable. Before you base your purchase plan on them, check the current position and the real requirements, because the rules of such programmes can change.

Is a higher down payment always worth it?

A higher down payment usually improves the loan terms, but it is not always optimal. If you spend all your savings on the down payment, you may be left with no reserve for around-purchase costs, renovation and unforeseen expenses. A safety cushion can be just as important as a lower instalment.

It pays to find a balance: a down payment high enough to secure good terms, but leaving a financial cushion. The decision is best made by looking at the whole situation, not just one parameter of the offer.

Summary: how to plan your down payment

The down payment is one of the key elements of preparing for a mortgage. Banks usually require roughly around 10-20% of the property's value, but you will learn the exact threshold and what counts as a down payment at the specific bank.

A higher down payment usually means better terms and a lower total cost of the loan, but it is not worth spending your entire financial reserve on it. Plan the down payment so as to secure a favourable offer while keeping a cushion for additional costs and unforeseen expenses after the purchase.