Lenders are happy to see that collateral going beyond the land charge (= additional collateral) as equity replacement funds in the financing (in the form of assignment or pledging). http://www.alexpages.net/bad-credit-ok-car-loans-can-i-still-get-a-car-loan-with-bad-credit/ fleshes this out
There are generally clear guidelines on how such additional security can be assessed and used to reduce interest rates. Some simply reject such “extra loops” outside of a very standardized customer business. Others, on the other hand, offer the possibility of providing additional collateral in order to achieve an interest rate reduction.
Which additional guarantees are useful for follow-up financing?
The possibility of integrating additional collateral into follow-up financing has a long tradition. There are many differences in the design of additional collateral (or equity replacement funds).
What is additional security for follow-up financing?
There is a central security for securing real estate financing – the land charge. Without a lender ordering a mortgage in his favor, there is no low building interest. The amount of the land charge is usually based on the amount of the loan. If you apply for follow-up financing in the amount of USD 190,000, the bank will also enter a land charge in this amount. This procedure is considered typical and normal for German banks.
Sometimes, however, there are necessities that make financing with a land charge as the sole security instrument impossible for the bank, for example, if the liquid equity is insufficient or the bank values the property significantly lower than the purchase price or construction costs.
Whether additional collateral is required depends primarily on the security needs of the lender and their lending policies. In these lending guidelines or credit guidelines, each institution specifies the conditions under which it wishes to grant loans. They differ from bank to bank.
In the case of follow-up financing, additional collateral is used less for the feasibility of financing described above and more for a reduction in interest.
What do banks think about additional collateral for follow-up financing?
Banks are very heterogeneous in their risk strategy when it comes to real estate financing. There are institutes that finance 100% of the purchase / construction sum relatively without hesitation, and in some cases also additional costs. Others deal with 80% or 90% financing. To do this, you have to know that banks are obliged by law to keep sufficient equity capital for their credit risks.
In simple terms, it can be said for your mortgage lending: the higher the risk, the higher the capital requirements and the more expensive the price or your loan interest. Viewed in isolation, this applies to every fixed interest period and for every institution. Regardless of this, it happens in a market characterized by many market participants that 100% financing of a price-sensitive provider can be cheaper than 80% financing of the expensive house bank.
If you no longer have equity liquid for your financing, but if necessary tied up in life insurance contracts, building loan contracts or in securities, this may have a positive effect on the interest rate or even enable financing in the first place. To do this, these claims would have to be assigned to the bank. The bank’s loan risk decreases and with it your interest rate.
What additional collateral is there in real estate financing?
A very obvious additional security can be the registration of a further land charge on another security object. If you or your parents have other properties that are not or only moderately burdened or in debt, this inclusion can be the key to the feasibility of financing. Even if additional security is not absolutely necessary, the interest rate can be reduced by hedging further property assets.
The following list of possible additional collateral is intended to make it clear that it is worth taking a look at your capital investments to see whether there is – sometimes almost forgotten – dormant capital that could be indirectly incorporated into financing:
- Entitlements from life insurance or pension insurance
- Credit from building society contracts
- Reserves from bank or savings contracts
- Claims from fixed-income securities or shares
- further property assets (own or possibly in the family)
- additional guarantees from family or friends
While the five first-mentioned options for hedging are risk-minimizing and thus interest-reducing, the guarantee in this context is more suitable for realizing the feasibility itself. It is required if the borrower’s income is not, not yet, or temporarily insufficient. The building society contract plays a special role in this context.
If, on the one hand, it serves to generate equity capital with previously noteworthy savings and a termination, on the other hand it offers – if the loan interest of the building loan contract is cheaper than the mortgage lending rate – the possibility to finance it up to the allocation with a shorter debit interest rate.