How much equity do you need to buy a house in Italy

“20 per cent equity, and you’ll be fine” – you hear this phrase so often that I now cringe inwardly every time. Not because the figure is completely plucked out of thin air, but because it’s a dangerous oversimplification. When buying a house in Italy, equity is more than just the part of the purchase price that the bank doesn’t finance. It’s significantly more, and it’s precisely this ‘more’ that isn’t adequately considered in most discussions. People realise this too late – namely, only when the appointment with the notary is looming closer than their own available funds.

That is why, in this article, I do not wish to provide you with a handy rule of thumb, but rather a formula with which you can calculate your actual capital requirements yourself.

The formula: What really counts as equity

The required equity is calculated as the purchase price minus the confirmed loan amount, plus purchase and loan-related ancillary costs, planned immediate improvements, a renovation reserve and a liquidity reserve. At first, this may sound like a lot of bookkeeping, but it can be broken down into six clearly defined categories:

One point I would particularly like to highlight, as it is often overlooked in practice: the final item. Unfortunately, this is all too often treated as a liquidity reserve, even though it should still be available after the purchase. A buffer that has ultimately been paid in full to the selling party, the bank or tradespeople is no longer a reserve, but simply capital that has been used up.

The Banca d’Italia also points out in its own guidance that, in addition to interest, factors such as bank valuations, notary and mortgage costs, and, where applicable, insurance premiums must be considered. When comparing loan offers, it recommends the standardised information sheet (PIES) and the annual percentage rate (APR) – although the latter does not necessarily cover all costs, such as notary fees.

How much does a bank in Italy finance?

80 per cent does not automatically refer to the purchase price

The standard banking guideline of up to 80 per cent refers to the value as stated in the bank’s valuation report, the so-called ‘valore di perizia’ – and this may well be lower than the purchase price negotiated with the seller.

 The bank also assesses income, existing financial commitments, age, collateral and the creditworthiness of the property itself. Although more than 80 per cent is possible in individual cases, it usually requires additional collateral and comes with less favourable terms.

To avoid this remaining an abstract concept, here is a calculation example that illustrates precisely these pitfalls: a house costs 300,000 euros, but the bank values it at only 270,000 euros. Assuming 80 per cent of the valuation, a loan of no more than 216,000 euros would be possible. This leaves a shortfall of 84,000 euros in own funds just for the purchase price – that is, 28 per cent of the purchase price, not 20. I would like to emphasise that this is merely an illustration of the valuation logic and not a loan commitment.

Another point that further complicates matters: A published Italian loan product from BPER Bank offers EU citizens financing of up to 80 per cent of the lower of the purchase price or the bank’s valuation. Product details, eligibility criteria and terms naturally vary, which is why I do not wish this example to be taken as a general banking rule – it merely demonstrates that this very ‘double cap’ does occur in practice.

How much financing is available to non-residents?

Care is required here. The Banca d’Italia does not specify a blanket statutory limit for foreign buyers. Specialised market participants often cite financing of around 50 to 60 per cent as a conservative planning figure for non-residents with income from abroad. Meanwhile, other sources cite even higher ratios for particularly strong EU profiles or specific offers. The BPER product generally allows EU citizens to apply and, subject to its further conditions, offers up to 80 per cent of the lower of the purchase price or the bank’s valuation. This range is a reality, and that is precisely why the final decision ultimately rests with the individual bank’s preliminary assessment.

My advice to every buyer is this: start by assuming a conservative loan-to-value ratio and obtain several specific offers from banks. There is simply no blanket rule stating that German buyers always need 40 per cent or just 20 per cent of their own funds.

One possible alternative may be financing secured against existing assets in Germany. However, this is not an automatic solution either: according to a specialist broker, German lenders often require a property in Germany that is eligible for a mortgage as security, rather than using the Italian property directly as such. Whether this is sensible and feasible for your situation must be assessed on a case-by-case basis.

Affordable repayments rather than the maximum possible loan

As a guideline, the Banca d’Italia recommends that mortgage repayments should not exceed around one-third of disposable income. For buyer’s resident in Germany, there is a second calculation to consider: what is left over after rent or mortgage repayments for their German home, after day-to-day living costs and after running the Italian property? An existing German mortgage may significantly reduce the scope for Italian financing more than one might initially assume.

Correctly categorising ancillary costs and taxes

Buying from a private seller: Tax should not be calculated blindly based on the purchase price.

When purchasing a residential property from a private individual without the Italian ‘Prima Casa’ tax relief, the Agenzia delle Entrate generally charges 9 per cent registration tax, as well as 50 euros each for mortgage tax and cadastral tax. What surprises many is that this 9 per cent is not always levied on the agreed purchase price. Under certain conditions, the so-called ‘Prezzo Valore’ rule may apply to private residential properties, whereby a value calculated from the cadastral assessment forms the basis for taxation – and this can be significantly lower than the actual purchase price.

Here is an example intended solely to illustrate the tax mechanism: if the relevant cadastral value is 150,000 euros, 9 per cent registration tax amounts to 13,500 euros. Added to this are 100 euros for the two fixed taxes – although the actual purchase price could well be 300,000 euros. Only the notary can confirm whether this basis of assessment applies to your specific property.

If, however, you are buying from a company rather than a private individual, VAT may be payable on the sale price. Ancillary purchase costs cannot therefore be equated with a fixed percentage of the purchase price – the seller’s status and tax treatment must be assessed from the outset.

Do not confuse ‘Prima Casa’ with ‘my first house in Italy’

The Prima Casa tax relief is subject to clear conditions, including, as a rule, residence in the municipality where the property is located or relocation there within 18 months, unless a specific exception applies. In the case of a standard holiday home or second home, you should not automatically factor this relief into your financing, however tempting the lower rates may sound.

The loan tax for second homes

For relevant medium- or long-term Italian mortgages, the notary’s office specifies a substitute tax of 2 per cent of the loan amount for properties that do not qualify as a ‘Prima Casa’. For eligible primary residences, however, the rate is only 0.25 per cent. This is a different tax from the registration tax payable on the purchase itself and may further affect the liquidity required. For a loan of, say, 180,000 euros, 2 per cent would amount to 3,600 euros. This figure forms part of the borrowing costs and must not be confused with the 9 per cent registration tax, nor should it be accidentally double counted.

Budget for running costs separately

For a second home, your annual budget should include, amongst other things, the local property tax (IMU), refuse collection charges, insurance, electricity, water, heating or air conditioning, maintenance and, where applicable, garden or pool maintenance. IMU rates vary from municipality to municipality; the Italian Ministry of Finance provides the current municipal rates for reference, and it is worth checking these before you commit to a specific annual outlay.

Three sample calculations

To illustrate the points made so far, I will work through three scenarios for you. Important to note beforehand: these serve as a budgeting method, not as published terms from a specific bank or as standard market ancillary costs.

For all three examples, the purchase price is 300,000 euros; 25,000 euros for purchase and mortgage-related costs, 20,000 euros for specific immediate works, 15,000 euros as an additional renovation reserve and 15,000 euros in liquidity available after the purchase are freely chosen but realistic assumptions.

The interpretation that is most significant to me here is: In the first model, the buyer’s own funds amount to 45 per cent of the purchase price, even though the assumed bank financing stands at 80 per cent. For me, this is precisely where the greatest added value of this calculation lies: the financing ratio only answers the question of the proportion of the purchase price, not the total capital requirement. The second model merely reflects a more conservative scenario planning approach; it is not a fixed rule for German buyers.

If the bank sets the valuation lower, the equity shortfall increases accordingly. If the seller demonstrably carries out work prior to the sale, or if the purchase price and financing terms turn out differently, the examples shift accordingly. None of these three models replaces an actual bank offer and a property-specific cost breakdown.

The most common mistakes

In my experience, the same pitfalls always recur when planning equity: confusing the bank’s valuation with the purchase price, even though the two can differ significantly; jumping to the conclusion that the Prima Casa discount applies, even though the property is a second home; and counting on financing before a written commitment has even been received. And perhaps the most common mistake of all: completely forgetting about the renovation and ongoing running costs of the property because one is too focused on the purchase price itself.

Frequently asked questions about equity when buying a house in Italy

Is 20 per cent equity enough?

Only possibly as the unfunded portion of the property’s value. Purchase costs, ancillary loan costs, renovation work and contingency funds must be added, and the bank may finance less than 80 per cent.

Can Germans obtain an Italian mortgage?

An Italian mortgage is not automatically ruled out for EU citizens. The loan-to-value ratio and terms depend on the bank, income, credit rating, place of residence and the property in question.

Does the bank use the purchase price or its own valuation?

According to the Banca d’Italia, the value determined by an independent expert is usually considered, which may differ from the purchase price. Some bank products also cap the loan amount at the lower of the purchase price and the valuation.

Is a second home more expensive in terms of tax?

Without the ‘Prima Casa’ benefit, a 9 per cent registration tax generally applies to private purchases instead of the preferential 2 per cent rate. With a corresponding Italian mortgage, an additional 2 per cent substitute tax may be payable on the loan amount instead of 0.25 per cent.

Can I simply include the renovation costs in the mortgage?

Not automatically. Whilst there are loan products available for both the purchase and renovation, the disbursement, valuation and required documentation vary depending on the specific product – before committing to a contract, you should have a concrete written commitment from the bank specifically for this project.

Conclusion

I wouldn’t give you a blanket answer such as “Germans need 40 per cent equity”, however much you’d probably like a simple figure. The responsible answer is less convenient, but more honest: only a written commitment to finance the purchase and a property-specific cost breakdown will reveal the actual amount of your own funds required – including the liquidity that must remain after the notary appointment. Anyone who goes through this calculation in full before buying, rather than relying on a catchy percentage figure, will spare themselves precisely the nasty surprises that are, unfortunately, all too common.