Leverage (Hebel)
Leverage is using borrowed capital (Fremdkapital) alongside your own money (Eigenkapital, equity) to control an asset larger than your equity alone would buy. It amplifies both gains and losses relative to the equity invested: a given percentage move in the asset's value turns into a larger percentage move in the equity's value, in either direction.
Why it matters
Leverage is the mechanism behind the largest financial decision most households in Germany make: buying property with a Hypothek (mortgage), where a down payment (Eigenkapital) of 20-40% controls 100% of the property's price movement. Banks describe the inverse of leverage as the Beleihungsauslauf (loan-to-value ratio) — the lower it is, the less leveraged the purchase, and typically the better the interest rate offered.
Reading a down-payment comparison table without a numeric grasp of leverage leads to two errors: crediting a mortgaged purchase's full appreciation to skill rather than borrowed capital, and underestimating how a modest price drop can erase equity entirely. Both errors compound with the percentage arithmetic (Prozentrechnung) already needed to work through Kaufnebenkosten (purchase-related fees) and interest costs.
Worked example
A property worth €400,000 is bought two ways: entirely with cash, or with 20% equity and an 80% mortgage. A year later, the property's value moves by an illustrative 5% — first up, then, in a separate scenario, down.
| Scenario | Equity in | Debt | Value if +5% | Equity after | Return on equity | Value if -5% | Equity after | Return on equity |
|---|---|---|---|---|---|---|---|---|
| No leverage (100% cash) | €400,000 | €0 | €420,000 | €420,000 | +5% | €380,000 | €380,000 | -5% |
| Leveraged (20% equity) | €80,000 | €320,000 | €420,000 | €100,000 | +25% | €380,000 | €60,000 | -25% |
The property's own value moved by 5% in both cases — identical to the return on equity in the unleveraged scenario. In the leveraged scenario, the same €20,000 change in property value is measured against €80,000 of equity instead of €400,000, so the return on equity is five times larger in magnitude: +25% on the way up, -25% on the way down. That factor of five is the leverage ratio (asset value divided by equity: €400,000 / €80,000 = 5). This simplified example ignores mortgage interest, repayment, and Kaufnebenkosten, all of which reduce the leveraged return somewhat but don't change the amplification effect itself.
The same mechanism applies to margin investing (Wertpapierkredit, a securities-backed loan), where borrowed capital increases exposure to an ETF or stock portfolio beyond what the investor's own cash covers — amplifying portfolio swings the same way a mortgage amplifies property-value swings.
Check yourself
A buyer puts €50,000 of equity into a €250,000 property, financing the rest with debt. What is the leverage ratio (asset value divided by equity)?
A property worth €300,000 is bought with €60,000 equity and €240,000 debt. A year later the property is worth €330,000. Ignoring financing costs, what is the return on the equity invested, in percent?
A property worth €400,000 is bought with €100,000 equity (25%) and €300,000 debt. It falls in value by 8%. Ignoring financing costs, what happens to the equity invested?