In comparison to private loans, building loans are only granted for financing needs that arise in connection with buying a property or carrying out building work on it. Building loans are normally only used for loans of €30 000 and upwards. The limits for the loan amounts depend on the ability of borrowers to repay them and are determined individually for each borrower.  Land, a house or an apartment serves as collateral for the creditor and a mortgage is taken out on this. An entry made in the land register showing that all or part of this property is mortgaged to the lender is the condition upon which the bank grants a loan. As well as collateral in the form of an entry in the land register showing the mortgage, creditors seek documentation showing that debtors have equity of their own, regular income and a clean credit record.

Long repayment periods and a long period of fixed-interest rates are typical for building loans. Once the fixed-interest period ends – it is usually shorter than the entire repayment period of the loan – a new interest rate must be negotiated with the bank. It is possible, at this stage, to obtain offers from other banks and credit institutes and – if these offer more favourable conditions – to restructure the debt. It may also be possible to do this before the end of the fixed-interest rate period, but early repayment charges could cancel out the effect of the more favourable conditions on offer. Once the contract has run for ten years, however, such contracts can be cancelled without paying a single Euro in early repayment charges. It is merely necessary to give six months notice of the cancellation.
Before granting a building loan, most banks will require borrowers to show that their own capital is equal to a certain proportion of the amount borrowed. In general, the rule which applies is that the less equity borrowers have, the higher the interest rate on the loan is likely to be.

Under certain conditions, it is possible that a bank will finance one hundred percent of a purchase. At the moment, property buyers stand to profit from low interest rates. From that point of view, it makes little difference whether a property is financed fully by a bank now, or financed by a bank and by private capital later, because borrowers will be confronted with higher interest rates in a few years time. However, the risks of a hundred per cent mortgage should not be underestimated: borrowers who are in the slightest unsure of how their carers will develop should refrain from taking out 100 per cent mortgages in order to avoid finding themselves unemployed and facing a mountain of debt. A higher repayment rate (at least 2%) should also be considered, in order to reduce the outstanding loan as rapidly as possible. In general, total debt should not exceed a maximum of 40 per cent of net income.

The financing of building projects or property purchases always depends on individual priorities and desires. Finance concepts are versatile, and the available selection of different types of loans - bank loans, building loans, insurance loans -  correspondingly large. Nevertheless, the differences in loan contracts all come back to two fundamental approaches to financing. These will be explained in the following section:

Annuity loans are property loans for which constant fixed repayment amounts (instalments) are paid over a period of time defined in the contract. In contrast to interest-only loans, the instalments do not vary over the entire lifetime of the loan. The yearly burden (annuity instalment or just annuity) includes both the rate of interest agreed for the loan and the principal. Usually, the proportion of the principal between 1% and 5% is repaid every year. Interest is repaid only on the sum of the loan still outstanding, and the interest saved is added to the repayments of the principal. This means that increasingly larger amounts of the principal are repaid in each instalment, as the level of interest due decreases. For example, a loan with an interest rate of 6% and repayment of the principal of 1% would be repaid in 33.5 years. Repaying 2 % of the principle would clear the loan in 24 years. At the end of the lifetime of the loan, the debt has been repaid in full.

After expiry of the fixed-interest rate period, the new conditions of the loan must be agreed between the parties. The market rate of interest at this time, applied to the outstanding debt, is decisive. This can result in the risk of interest rate adjustment. In order to reduce the entire time span of the loan and the total amount of interest due, an option of making extra yearly repayments during the fixed-rate interest period can be negotiated.

A fixed-interest loan is a loan with conditions guaranteed by the bank for a particular period (usually 5, 10 or 15 years). In contrast, the interest on variable-rate loans can change at any time.

With a fixed-interest loan, the borrower and the lender can agree that interest-only repayments will be made over a certain period. The savings made by deferring repayments in this way are invested into a separate financial product and then used to repay the principal in a lump sum at the end of the lifetime of the loan. Income from various different finance products is relevant here: endowment life insurance, savings agreements, pension insurance or investment funds. The lender is given the rights to the “savings” agreement as security for the loan. This investment gives the borrower the chance to generate a surplus beyond what is needed to repay the loan with interest. On the other hand, these products involve risk, as the return from funds and the values of life insurance policies at maturity may not be or may only be partially guaranteed. All of these savings instruments also share the disadvantage that not all of the money invested goes towards building up a stock of capital, as some of it is used for commission, fees and administrative costs. As no principal is repaid, the loan capital is not reduced, so the interest payments during the loan period remain constant over the entire lifetime of the loan.

Deferred repayments of the principal usually form part of a particular financing strategy. For example, the financial product life insurance can play a role in financing property, especially rented property. Deferring repayments of the principle can be an effective way to secure threatened loans and with that to retain the original building finance.

In general, it must be noted that in addition to rights to cancel property loans fixed in law, it is always possible to repay loans in part or in full without any penalties at the end of fixed-interest periods. It is also possible to transfer such loans to another lender when this period ends. The income from existing life insurance or funds can, of course, also be used to pay back the outstanding debt from annuity loans.

Whether you want to extend an existing loan or take out a new one, the first offer you receive is rarely the best one. Compare the offers from your principle bank with those from the competition and from intermediaries such as brokers. It is particularly important to compare the rates of interest available. You should never compare nominal rates of interest; the annual percentage rate (APR) is more useful as a basis for making decisions. A tenth of a percentage point (from 4,5 to 4,6 %) can make a loan of         100. 000 Euro over 20 years 2 516 Euro more expensive. The best basis for comparison of conditions is a detailed repayment plan from the relevant credit institute which shows all costs and gives a figure for the debt which will still be outstanding when the fixed-interest period expires. The lower this figure, the better the offer is.

Equity is the Alpha and the Omega of solid financing. Use your own resources – apart from a small rainy-day fund – to help finance your investment. The bank will charge you more interest on the loan than you will get for your savings, so squirreling away money is pointless – it makes more sense to use your savings towards your purchase. You will save interest and generally also be offered better conditions on the loan. A mix of 30 per cent equity and 70 per cent borrowing can be considered solid.

The interest rate difference for real estate loans of 10, 15 or 20 year durations is minimal. When interest rates are low, the longest possible fixed-interest period should be accepted. Only experienced investors should make use of variable-rate loans or combination deals, even when interest rates make the time seem opportune for them.

Pay attention to whether it is possible to make extra repayments. What this means is that once a year, you can pay back part of the loan (usually up to 5% of the original sum) in addition to the repayments fixed in your loan contract. These clauses are now standard and rarely linked to penalties. Extra repayments have a clear advantage: as your outstanding debt is reduced, you save the interest on the extra repaid. For example, if you make a single once-off payment of 2 500 Euro and the interest rate of your loan is 4,5%, then you can save 1 400 Euro interest over ten years – or 3 600 Euro over twenty years.

Interest rates for property investments are at a historic low at the moment – buying an apartment or building a house is cheaper than it has been for decades. Property owners with financial arrangements which are drawing to a close can use forward loans to secure the current low interest rates for several years in advance. If you negotiate a loan contract with your bank now, you can fix interest rates for 15 or 20 years. While that will cost you an extra interest premium of 0.1 to 0.3 percent, it will also give you peace of mind over the coming years, as you won't have to worry about rising interest rates.