Anyone interested in buying a property should also think about financing. After all, due to the low interest rates on the capital market, debt financing is nowadays as cheap as never before. But if you deal with such questions, then you quickly come to the thought of buying a property completely externally financed. In addition to the purchase price, there are often further costs for brokerage, notary and court fees at the Land Registry as well as the real estate transfer tax to be paid. Therefore, these considerations concern a 110 % financing of the properties to be acquired. However, banks often make this dependent on both the creditworthiness of the borrower and the value of the property to be acquired. In addition, 110% financing for the acquisition of real estate can only be successfully targeted repeatedly within a few years. However, if the framework conditions are right, this is also conceivable.

This time in our blog post we deal with a topic that at first glance is only marginally associated with taxes. In fact, we want to deal exclusively with those aspects that are largely detached from taxes. Instead, we are looking at a point of view concerning wealth building. This is about buying real estate. More specifically, it is about the debt financing for such an acquisition.

Since interest rates on the capital market are very low nowadays, more and more banks have moved over time to make generous loans that enable the acquisition of certain valuable objects that serve as economic goods. You can even get loans that are significantly above the actual purchase price. In this way, loans also cover the acquisition costs associated with the acquisition, so that the borrower does not need to contribute equity. Such financing, which may include up to 110 % of the purchase price, is possible in particular when buying real estate. It is often more advantageous than self-financing. Therefore, we now inform about the peculiarities to which one should pay attention.

But before we go into detail about the peculiarities of 110% financing when buying real estate, let’s look at the general aspects of this. Right from the start, we have to distinguish between the purchase of a property for private use and one that one intends to rent. Here, the valuation approaches used by banks to determine the value of a property that is intended to serve as collateral against a credit default may also vary widely; We will go into that in more detail in a moment. In addition, the location of the purchase object and many other qualitative characteristics are relevant. In addition, the expected performance of the desired property is also of great importance. And of course, the asset situation and credit rating of the buyers also plays a major role, whether a bank supports the 110% financing for real estate. Sometimes it can even make sense to involve more than just a bank in the financing of a property.

First of all, we address the peculiarities that play a role in 110% financing of self-used properties. On the one hand, the valuation of the property plays a role, but on the other hand, the assets and creditworthiness of the borrower are of particular importance.

The financial strength of the borrower is so important when it comes to the 110 % financing of a property to be purchased for private residential purposes, because the property itself makes no contribution to the repayment and service of the interest. On the contrary: the property used for own residential purposes is itself a cost factor. In addition to the running costs for the maintenance of the property, the property tax must also be paid. In any case, the borrower must cover all these costs from his own income.

This brings us to the next important point, namely the view on the financial strength of borrowers. On the one hand, the amount of income plays a role here. On the other hand, the type of income is also relevant. Is the person who wants 110% financing for the purchase of real estate employed or self-employed? How high and how regularly do income flow? What tax obligations does the person have to deal with? All this allows an initial assessment of the financial possibilities that a potential borrower can cite as positive arguments.

However, the analysis would be incomplete if one ignored the personal behavior of a potential borrower in financial matters. Therefore, within the framework of a credit check, an assessment of the reliability shown in the past in this regard takes place.

Another aspect now lies in the evaluation of the property to be financed itself. Even in the case of a purely privately used property, the expected increase in value is an important factor in deciding whether a bank grants 110 % financing for such properties. But the banks get to the bottom of the real estate value in a property value procedure. This is basically similar to the property value procedure, which we know from tax law. Thus, the analysis of the potential construction costs is the focus of the evaluation. However, this special property value procedure for real estate also takes into account the situation and future performance of real estate. A property in a rural environment often seems less attractive than an urban property. For a city property, however, you also have to look more closely. After all, the property value of real estate in social hotspots is of course different than in a villa district.

Incidentally, the bank’s property valuation method and that in tax valuation law differ most clearly in relation to the situation factor. Because a distinction according to the situation is generally unknown to the tax laws. Only in some federal states does the location of a property influence the valuation and thus the taxes. This is about the property tax, as it is to be calculated in Lower Saxony according to the area-location model in the future. But enough of it – this time we wanted to report less on taxes than on the possibilities for debt financing in real estate purchases (so we could not stand to do without taxes); It must be a kind of occupational disease...

On the other hand, it is a bit easier if you aim for 110% financing for the acquisition of real estate that you intend to rent. Finally, such real estate contributes to the repayment and interest payment, so that to a certain extent they bear the financing and, indirectly, the purchase costs themselves.

Of course, an in-depth analysis of financial strength and creditworthiness also takes place for enquiries about 110% financing of real estate. However, this examination also includes the aspect of the economic performance of the properties to be acquired. With which we already move on to the assessment of the properties to be financed.

The valuation of real estate that you want to buy externally financed in order to rent it or use it commercially takes place via an income value method that is quite similar to that of the Valuation Act. The basis here is also the amount of income that can be expected in connection with the property. Indeed, this aspect can have a significant impact on the decision whether a bank provides 110 % financing for the purchase of such real estate.

But the location of the property also plays a role. After all, real estate in large cities is more attractive in this respect than otherwise equivalent land and buildings in rural areas. This is reflected by the multipliers used in these assessments. Compared to similar multipliers used in tax valuation in the simplified income method, these multipliers are significantly better suited to determine the current and future property value. Nevertheless, they are also below the now strongly increased real estate prices, which have risen sharply in larger cities. But the banks also know this of course and adapt to this in their decisions on lending.

No matter how banks carry out the valuation of real estate for which they are to provide 110% financing, the value is always below the current and, as a rule, even below the future market value. Nevertheless, the banks also know this factor correctly, so that they still take over the financing in cases that seem favorable to them.

In addition, we find that 110% financing from real estate is more likely in precisely those cases where the real estate finances itself, at least in part. Banks are the most suitable for rental properties, whereby rented housing is better than commercially used properties due to the generally lower wear.

Regardless of other requirements, the credit rating and above all the financial and earnings situation of borrowers are often the decisive criteria according to which banks grant 110 % financing of real estate. However, it must be mentioned that the probability of such financing has recently declined due to various external influences.

By the way, lending is always subject to some general conditions. For example, an employment relationship or a self-employed professional or commercial activity is a universal prerequisite for 110% financing. An employment relationship that is still in the probationary phase is already a reason for exclusion for many banks. Conversely, banks also prefer to negotiate with two life partners rather than with a single person. Because in the event of a credit default by one of the two borrowers, there is still another contact person from whom they can have their claims fulfilled.

Keeping all these aspects in mind, one should possibly seek further financing of this kind for new objects in the nearest possible future. After a few years, if a certain part of the current loan was repaid without any special incidents affecting the agreed payment, then banks are likely to look favourably on the 110% financing for new properties again. After all, you have already proven that you are a trustworthy borrower in this regard, in which the risk of a credit default seems rather low.