Additional financing

If construction financing, building projects or property purchases become more expensive than originally estimated, the additional financing requirement is in many cases covered by an additional financing loan.

An additional financing is a new loan that does not form part of the initial financing. The newly negotiated loan for additional financing is therefore also not available under the same conditions as the originally planned construction loan, since the borrower often cannot provide any further collateral. In most cases the previously set loan-to-value limit may not be exceeded. The loan-to-value limit indicates how high the borrowed sum may be at most.

The processing effort for the financing bank is very high, which is reflected in the costs for this additional financing. The range of financing providers that are suitable for additional financing is very limited due to the borrower's weaker starting position.

Additional financing is not a follow-up financing. These terms may appear very similar but are two different types of loans. A follow-up financing is used when the outstanding debt for a loan is to be repaid after the fixed-interest period expires. Additional financing, on the other hand, is used when the money already borrowed is not sufficient.

A financial buffer can prevent additional financing

A construction loan covers all costs required for the construction or purchase of a property. The costs for land registry entries and the notary should therefore not be neglected. In general, these costs are covered by the equity capital required by the bank. However, if properties are financed in full, these costs must also be calculated.

Financing is always completed before construction work begins or before purchasing a property. Unforeseen construction measures and difficulties often only arise during the construction phase. The additional expenses for craftsmen and extra construction work are usually not calculable, because an architect calculated the financing needs under more favorable building conditions. The need for renovation or refurbishment in existing properties can often only be established after moving in. Defects in the purchased property also often only appear after months or years. All these reasons for additional expenses lead to the property owner no longer having sufficient funds and needing additional financing.

To avoid a more expensive additional financing, borrowers can already act when taking out the first loan. The best negotiation opportunities always exist when taking out the initial loan. Here borrowers can build in a financial buffer that can prevent the need for additional financing.

Many financing providers even propose this buffer, but they charge compensation if the agreed amount is not needed. Especially for purchase properties a financial buffer is usually subject to charges if it is not used. For new builds these buffers are part of the contract with most mortgage lenders at the time of loan origination and do not have to be compensated if not used. Compensation for non-utilization must always be agreed in writing with the mortgage lender.

Special repayments can prevent additional financing

Agreeing on relatively high and multiple special repayments is another way to avoid additional financing. With this form of financing, a larger loan amount is agreed at contract signing that exceeds the costs of the property or construction project by around 10 to even 20 percent. The loan is paid out in full.

If the additional loan amount taken is not needed after the construction phase, it is paid back to the mortgage lender as a special repayment. With this option the borrower incurs no further costs except the interest on the additionally taken construction loan. These interest costs are, however, much lower than the costs that can arise with additional financing.

Additional financing is possible with a subordinated loan

Many lenders and mortgage providers are not interested in providing additional financing because the borrower's collateral is insufficient. Apart from the lack of collateral, the subordination that the original financer receives is a very important criterion.

The mortgage lender that granted the main loan is recorded in the land register as the first-ranking creditor. If the property has to be sold because the owner is unable to meet their payment obligations, the creditor recorded in the land register is paid first.

Lenders who provide a subordinated loan therefore make this very expensive, as they have few competitors. Especially banks that were not involved in the original financing have no interest in cooperating. For these reasons the original mortgage lender is often also entrusted with the additional financing.

Interest rates for the subordinated loan are usually several percentage points above the interest rate of the mortgage, and processing fees are charged again.

Negotiate additional financing effectively!

If additional financing cannot be avoided, the borrower must negotiate well. Borrowers should under no circumstances go into these negotiations unprepared and should be able to substantiate the required loan amount with meaningful figures and quotes from companies.

The construction measures or renovation and refurbishment works to be financed with additional financing must be clearly presented to the financing provider and should, ideally, lead to a value increase of the property. The borrower must provide current proof of income again for the new loan.

Measures to avoid additional financing

To avoid the need for additional financing from the outset, home builders and property buyers have numerous options. The costs for the construction project or the purchase of the property can be calculated and assessed by an independent expert. Because of their objectivity, these experts can provide better and more accurate estimates. Unforeseen costs can thus also be calculated in advance.

If the property or project was calculated below the actual value, in some cases additional financing may be possible without taking out a new loan. This must, however, always be negotiated with the responsible lender. A written expert opinion strengthens the borrower's position with the bank and also puts them in a better position in the event of additional financing. For most mortgage lenders, this objective evidence from an independent financial expert is also a criterion for further lending.

To avoid additional financing caused by overly tight budgeting, choose a mortgage lender with extensive market experience.

An important part of a construction project is covered by own work and help from family. Many tasks in new builds, but also renovations and refurbishments of purchased properties, can be carried out without hiring a professional. However, financial claims that arise from improper workmanship may then be forfeited.

Make full use of subsidies

It is also important to fully exploit all government subsidies when buying or building a home. Houses built according to energy efficiency criteria or properties that are subsequently renovated to implement energy-saving measures receive special conditions and subsidies. Government subsidies are usually applied for directly by the mortgage lender and are included in the initial financing.

The choice of building materials can also prevent additional financing in advance. Many materials do not have to be purchased from the builder or craftsman and can be bought more cheaply through retailers or the internet. This is often a cheaper alternative, especially for kitchen fittings or sanitary installations.