Variable property financing – as a clever move

As a person who wants to acquire a new home, you have two options: Either you purchase an existing property (buying a plot of land and a building) or you buy a new real estate. In case of  new construction, there are as well two opportunities: the purchase from the property developer, as part of an „all inclusive package“, or the aquisition of real estate and the subsequent construction, as two separate procedures. Often, the opportunity comes up by chance or very spontaneously. For the invester the location is the most important factor, and in case of a suitable building site you should act quickly. There may be some time between land purchase and building development. Those, who do not have enough funds to finance the property with their own resources, will need a financing at that time. The remaining topics will explain which variants are available for this and what kind of risks and opportunities arise through this.

Financing through an annuity loan

An option would be funding with a loan, through an annuity loan with a fixed-interest period  chosen by you. This kind of credit stands out by its good conditions and it also offers the advantage of securing the interest rate, in the long term.

Dependence

However, the above mentioned method of financing contains a critical issue. You may find yourself unintentionally in a dependence. How does this happen? The bank, as the financing institute, has primarily recorded a land charge in the land registry. And the loan which is needed for the property construction has to be secured by a secondary mortgage. This so-called subordinated financing is more risky for the second bank, because in case of insolvency this banking institute is not entitled to receive priority security. That is why every bank will demand compensations for taking that kind of risk, by charging higher rates. In an insolvency situation, the bank which is in charge with real estate financing shall also have the primary right to be paid out. Furthermore, this bank is aware of the fact that in terms of development financing the other banks won´t offer very good conditions. This means, the relevant bank will also charge a higher rate without turning a hair, in order to acheive a better margin. How should this dilemma be resolved?

Variable loan – at first pricey, but in the long run more benefical

In case of an ordinary loan, you depend on the bank which finances your property, because it is secured primarily and it has a fixed-interest rate term. The solution for dealing with this kind of problem is to carry out interim financing, in form of a variable loan. With a variable loan there is no interest fixing. That is to say, the variable rate will be reviewed every three month, and it will automatically adapt itself to the current interest rate market. Your interest rate may thus change positively or negatively, every three month. The disadvantage is that you do not have planning security. And because of the included flexibility, the variable rate is more expensive. However, the main advantage is that the loan can be terminated with a period of four weeks, without beeing obliged to pay penalty interest. In practice this means the following: The second bank, which allows you a credit for construction, will increase the loan amount by the outstanding debt of the property financing. Also, it will replace the first bank. And in return, the primary land charge will be deleted or it will be assigned to the second bank.

On the whole, it means that the relevant bank is recorded in the land registry in the first place, and so it will give more beneficial rates as a reward.

By choosing a variable property financing, you are completely unbound and you can use this scope of negotiation for the benefit of a favourable interest rate, which would have been impossible with another bank.

 

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