Property FinancingEquity, Loans and Subsidies

How Much Equity Do You Need?

Rule of thumb: At least the incidental purchase costs (approx. 7–9% in Bavaria) plus 10–20% of the purchase price. The more equity, the better the loan terms.

Example (purchase price €200,000 in Upper Franconia):

---

Loan Types at a Glance

Annuity loan (Annuitätendarlehen)

The classic: a constant monthly instalment made up of interest and repayment. At the beginning the interest share is high; over time the repayment share increases. Typical fixed-rate periods: 10, 15 or 20 years.

KfW loan

The Kreditanstalt für Wiederaufbau (KfW) offers low-interest loans for energy-efficient properties and renovations. KfW loans can be combined with the bank loan. Current programmes: kfw.de.

Building savings contract (Bausparvertrag)

A combination of a savings phase and a loan phase. It secures a fixed loan interest rate for the future. Potentially useful when interest rates are rising, but complex and with a long lead time.

---

Fixed-Rate Period and Repayment

Fixed-rate period (Zinsbindung): The period during which the interest rate is fixed. The longer it is, the more predictable – but also slightly more expensive. When rates are low, a long fixed period (15–20 years) is worthwhile. When rates are high, a shorter fixed period with the option of cheaper follow-up financing can make sense.

Repayment rate (Tilgungssatz): Determines how quickly the loan is repaid. An initial repayment rate of at least 2% is recommended. At 1% repayment, paying off the loan takes more than 40 years.

At 3.5% interest, full repayment takes around 43 years with 1% repayment, around 29 years with 2% and around 22 years with 3%.

---

Making Use of Subsidies

KfW programmes: Low-interest loans and repayment grants for energy-efficient new builds and renovations. → kfw.de

BAFA and KfW grants: BAFA subsidises individual energy-saving measures on the building envelope, KfW subsidises the replacement of heating systems. → bafa.de

BayernLabo: The Free State of Bavaria supports owner-occupied homes with low-interest loans, depending on income and household size. The former Bavarian home ownership grant (Bayerische Eigenheimzulage) is no longer granted to new applicants. → BayernLabo

A detailed overview is provided in the guide Subsidy programmes for purchase and renovation.

Wohn-Riester: Riester pension subsidies used to repay a property loan. Particularly interesting for families with children.

Principle: Subsidies generally have to be applied for before the purchase.

---

Typical Financing Mistakes

Setting the instalment too high: Build in a buffer for maintenance, running costs, changes in income and higher interest rates on follow-up financing.

Forgetting incidental costs: The incidental purchase costs of 7–9% have to be financed from equity – banks do not lend against them.

Too short a fixed-rate period: When interest rates are moderate, a long fixed-rate period ensures predictability. Follow-up financing at higher rates can increase the monthly instalment drastically.

No comparison: Obtain at least three financing offers. For the same term, the interest rate differences between banks can amount to several thousand euros.

→ Independent advice: Verbraucherzentrale Bayern

---

The Underestimated Risk: Follow-Up Financing

When the fixed-rate period ends, a large part of the loan is usually still outstanding. Nobody knows today at what interest rate it will continue. An example: loan €300,000, 3.8% interest, 2% repayment, instalment €1,450, fixed-rate period ten years.

Just two percentage points more mean €200 more per month. Anyone who could not afford that should choose a longer fixed-rate period or repay faster. From about three years before expiry, a forward loan (Forward-Darlehen) can lock in the interest rate for the follow-up financing – at a surcharge.

Good to know: ten years after full disbursement, you can terminate any fixed-rate loan with six months' notice, without an early repayment penalty (§ 489 BGB). A fixed-rate period of 15 or 20 years therefore gives you security without tying you down indefinitely.

What the Bank Checks

The more complete your documents, the faster the loan approval – and the stronger your position towards the seller. The documents you need for the property are listed in the checklist for buyers.

Comparing Offers Properly

Do not compare loan offers by the nominal interest rate alone:

1. Effective annual interest rate: includes all costs and is the only comparable figure.
2. Special repayment right: Usually 5 to 10% of the loan amount per year free of charge – important if you expect bonus payments or inheritances.
3. Change of repayment rate: The option to adjust the repayment rate during the term.
4. Commitment fees (Bereitstellungszinsen): Charged if the loan is not drawn down – important for new builds and renovations. Make sure the commitment-fee-free period is long enough.
5. Loan-to-value ratio (Beleihungsauslauf): With a higher loan share, interest rates rise in steps. Sometimes it pays to contribute a few thousand euros more equity to reach a cheaper tier.

Financing for Investors

Anyone who lets a property calculates differently from an owner-occupier:

• Interest on debt is a deductible expense (Werbungskosten) and reduces the tax on rental income. That is why many investors deliberately use less equity.
• A lower repayment rate increases cash flow but extends the term and the interest rate risk.
• The bank includes the rent in its assessment: Usually 60 to 70% of rental income is counted as income.
• Several properties: From the second or third property onwards, it pays to plan the financing strategically and not to link collateral unnecessarily.

How interest, repayment and tax affect returns is shown in the guides Calculating rental yield and Depreciation (AfA) on property.

How Financing Works Step by Step

We work with independent financing partners from the region – find out more under financing brokerage. The entire purchase process is described in How a property purchase works.

Special Cases in Financing

Self-employed buyers: Banks usually require the annual accounts and tax assessments of the last two to three years and work with an average income. Fluctuating profits lead to deductions. Good preparation and an adviser who knows the self-employed are particularly important here.

Unmarried couples: Both can finance together and become joint owners. In the land register, the shares should correspond to the equity contributed; a partnership agreement regulates what happens in the event of a separation.

Older buyers: Financing is possible even at 60 or 70 if repayment remains affordable into old age or there is sufficient equity. Banks then pay particular attention to pensions and assets.

Bridging when selling: Anyone who buys a new house first and then sells the old one needs interim financing. This is more expensive and riskier; it is better to coordinate the sale and purchase carefully in time.

Planning the Monthly Burden Realistically

In addition to the loan instalment, there are further monthly costs in your own house. An example for a detached house of 140 m²:

Many buyers only count the loan instalment and underestimate the other costs. Anyone who consistently saves the maintenance reserve is prepared for a new roof or a new heating system. More on running costs under Incidental purchase costs in Bavaria.

Combining Financing and Renovation

Anyone who buys and renovates an older house should finance both together. Banks then assess the value after renovation, and subsidised loans for energy-efficient renovation can be included. Important: the renovation costs must be estimated realistically, ideally with tradesmen's quotes and a renovation roadmap. Additional financing during the construction phase is more expensive and more difficult. Background under Buying an older building and Subsidy programmes.

---

FrankenImmo – Results-driven brokerage
Phone: 0151 58363197 | Financing brokerage