Financing without property loans

Surely everyone has dreamed of owning their own property at some point. After all, real estate—whether a private home or an apartment building—is a secure and profitable investment. The purchase of a property pays off in the long term, helps build wealth, and enables rent-free living in retirement. The most common financing method is a building savings contract (Bausparvertrag) in combination with a construction loan (Baudarlehen) to buy, build or renovate properties. However, without equity it is often difficult for future builders to obtain a suitable and affordable mortgage financing for their construction project. Full financing for properties is problematic. As a rule of thumb, at least 20 percent, preferably 30 percent, of the purchase price should be available as equity for security. Those who have not taken out a building savings contract early on must expect bleak prospects. Nevertheless, it is still worthwhile in such cases to submit a non-binding enquiry.

Financing real estate with a property loan

The situation is different with property loans, where the owner of the property is not the possessor but the lender until the loan amount has been repaid. The property loan represents a loan for real estate, which are referred to here as objects. These loans enable individually tailored financing for all kinds of properties. There are property loans for purchases or constructions of residential properties, investment properties such as factory halls or production facilities, or, for example, guesthouses like riding stables, as well as office properties. An equity contribution is not required when taking out a property loan, although it is also welcomed.

Collateral for lenders and borrowers

Because an equity contribution is not required, a property loan can be used by any future property owner, since the property itself provides security for both lender and borrower. In the event of payment defaults, the property can be sold and contribute to repaying the loan. This helps keep default interest and dunning fees to a minimum. To make this possible, an entry in the land register is made by the lender. This gives the lender access to the land and the property and allows them to pledge or sell it if the borrower can no longer meet their payment obligations. The entire property serves as collateral here. Only after the full repayment of the loan amount does the borrower receive the entry in the land register and only then do they become the owner of the property. The property loan thus resembles a hire-purchase, as is often offered for residential properties, but it goes beyond residential properties and is intended for the financing of all types of real estate. If, contrary to expectations, payment difficulties or total insolvency of the borrower occur, the property loan has the advantage that the borrower does not have to handle the sale or the pledging of the property themselves. Unlike conventional construction financing or mortgage financing, the property itself is used as collateral, so insolvent borrowers are not forced into a rapid sale—often below the property's value—to meet repayment deadlines and at least partially repay the loan. If insolvency occurs, the lender is entitled to sell the property. No further costs or debts arise for the borrower. To ensure the lender's outstanding claims can be covered, the property is inspected by an expert before the loan is granted and the market value is determined so that claims can be covered as fully as possible by proceeds from the sale. The market value of a property represents the highest possible selling price and can differ from the actual purchase price. The greater the difference between the property's market value and the actual purchase price, the more secure the financing, because the mortgaging of a property cannot be made for the full amount of the purchase price. The loan-to-value limits apply here, therefore the lending value is often lower than the purchase price, i.e. the loan amount. However, properties with a high market value can, depending on market conditions, be sold for more than the lending value and thus better cover outstanding claims.

Loan amount, terms and interest of a property loan

The amount of the property loan depends on the purchase price of the property plus the ancillary purchase costs, which are not insignificant and should definitely be included when taking out the loan. Ancillary purchase costs typically consist of the broker's commission, the real estate transfer tax, and the fees for the notary and the land registry office. Regardless of the fact that the borrower of a property loan is only the possessor and not the owner of the property, they must cover the costs incurred during the acquisition. These costs are also included in the loan amount, so the buyer does not have to make upfront payments. Furthermore, the borrower is spared the trip to authorities, as the entire process—from purchasing the property with a prior valuation by an expert to the entry in the land register by the lender—is carried out by the lender. The brokerage fees amount to between three and six percent of the purchase price, depending on the federal state and the market value of a property. Value-added tax is added. Not every property purchase has to be through a broker. The real estate transfer tax also depends on the purchase price and is between three and five percent of the actual purchase price, depending on the region. The real estate transfer tax is paid to the tax office. The costs for notaries and for the entry in the land register generally amount to one to two percent of the purchase price. When purchasing with a property loan, this service is usually provided by the lender's notary. Costs can be queried by the borrower in advance. If these are very high, another notary can be suggested. The loan amount in a property loan is generally very high, primarily because in most cases it is a form of full financing and no equity is used. Therefore, a property loan is also characterized by a long term. Flexible terms or special repayments can be agreed with the respective lender in addition, but due to the large sums involved in property loans, these are rather exceptions. Interest rates for a property loan are considered relatively favourable. The rate varies depending on the lender. A comparison of providers is therefore advisable. The relatively low interest rate for property loans is not only due to the long terms but also to the security provided by the property itself. Whether a property loan is granted depends primarily not on the borrower and their liquidity or income, but on the property. For properties deemed unprofitable or worthless, a loan may be refused.