Glossary

Real Estate and Financing Lingo

When buying property you may encounter some pretty strange sounding terms. But they are important. So here is an overview

No need to feel like it's an uphill climb when confronted by weird real estate words. Use our glossary when you need a lift

Annuity loan

Long-term loan repayable in fixed loan installments. The installment (= annuity) consists of interest and repayment, with the interest and repayment portions of the amount changing in inverse proportion to each other as the loan amount shrinks.

Follow-up financing

Upon conclusion of the fixed interest period, the existing loan is replaced by newly negotiated conditions. This can be with the same bank or another one. Depending on interest rate development, this can be associated with higher or lower interest conditions.

Conveyance

Notarized agreement between the seller and buyer regarding transfer of a property. The transfer of the property is only made final through the conveyance and entry in the land registry.

Building-saving

A building loan contract offers long-term planning security through the building loan: upon concluding the contract, the building and loan association sets the rate of the later loan interest rate – irrespective of the development of mortgage interest rates.

Lending limit

For financing purposes, the bank regards the property as collateral – not in full, however, but only up to a certain limit stipulated by law or by the financial institution's articles.

Commitment interest

This is an interest payment to the bank for an already provided loan that the borrower has not yet or only partially drawn. The commitment interest is usually 3% p.a. or 0.25% monthly on the portion of the loan not yet drawn. The period after which this payment is due varies by bank.

Commitment interest-free period

This is the period in which no commitment interest on still undrawn loans or tranches thereof is due. (See also commitment interest.) The length of this period can be negotiated between the borrower and the bank. This can save additional costs in case a portion of the loan can only be drawn later due to required building measures.
 

Readiness for occupancy

This is the case if the property is considered livable. The precondition for this, apart from functional sanitary facilities, is the ability to move safely in the property. Missing exterior fixtures or exterior plaster is immaterial.

Personal need

The reason for termination of the rental contract by the landlord. If the landlord can prove that he/she needs the apartment for him/herself or immediate relatives, the tenant must vacate the apartment.

Equity

Personal assets used for the purchase or financing real estate. This includes cash, bank and savings deposits, stocks or unencumbered real estate, as well as the cash value of life and pension insurance.

Owner's association

Association of all apartment owners. The rights and obligations of each party are governed by the declaration of apportionment, the association rules, and the house rules.

Common property

This includes all parts of the property that do not belong to any individual in the owner's association (special property) or third parties. Examples: staircases, elevators, façades, roofs, and power lines.

Title register

Register administered by the district court (Amtsgericht) containing the legal information for a property. The register includes the size and type of use, ownership as well as rights, encumbrances, and restrictions.

Land acquisition tax

This tax applies to the acquisition of real estate or land. It is a state government tax and amounts to between 3.5% and 6.5% of the purchase price depending on the state. In Berlin, the current rate is 6%. 

Land charge

Security on the part of the borrower towards the creditor that is entered in the land registry. This secures the bank's loan receivables with regard to the borrower. In case of failure to pay, this can be enforced and used to cover the loan debt owed to the bank.

Owner's association fee

Monthly advance payment for utilities and maintenance fund of the owner's association. This is normally paid to an administrator based on an economic plan.

Maintenance fund

Reserve fund for fixing damages and repairs to common property. This is calculated based on the living space of the respective apartment and must be paid by all owners.

Purchase price due date

The notary informs the buyer of this date. The purchase price only falls due when the notary has all documents pertaining to the purchase property and a provisional entry has been made in the land registry.

Release from encumbrances

If a property has encumbrances (e.g. a land charge) and it is sold, the buyer has an interest in the property being transferred free of any encumbrances. The buyer is released from all encumbrances entered in the land registry – in particular from mortgages. The release from encumbrances must be clarified unambiguously in the notarized acquisition contract.

Agent's commission

Compensation for procurement of a property by an agent. The maximum amount is determined by the local standard commission. In Berlin the standard is six percent plus VAT – i.e. 7.14% – of the purchase price.

Undrawn loan tranches

For construction projects and real estate purchases, there is the possibility of obtaining a non-acceptance option for a portion of the loan. This means that a pre-defined amount of the loan can be returned to the bank free of charge and the total loan amount reduced. This can make sense if, at the time of the loan payment, the borrower's equity to be used in the project has increased.

Notary

The purchase of real estate in Germany must be notarized in order for the contract to be valid. The buyer and seller (or their representatives) must be present for the notarization. At the meeting, the notary reads the document. In addition, all maps, drawings, and illustrations to which the sale document refers must be submitted for perusal. Notarization fees typically amount to 1.5 percent of the sale price.

Borrowing and effective interest rates

The borrowing interest rate indicates the interest rate applied to a loan. The effective interest rate is the annualized interest rate applied to almost all costs associated with a loan. This interest rate enables the consumer to compare various loan offers with each other. Your financial adviser will be happy to explain this to you in detail.

Special termination according to the German Civil Code (BGB)

Section 489 of the German Civil Code entitles any borrower of a building financing loan for which a fixed interest rate is applied for a certain period of at least 10 years to terminate the contract free of charge in full or in part after 10 years with 6 months' notice.

Special use permit

This certifies an exclusive right of use to an explicitly defined part of the common property – for example parking spots, basement rooms, or parts of the yard.

Unscheduled repayment option

In addition to scheduled repayment, with most banks it is possible to arrange unscheduled repayment. This entitles the borrower – without any obligation – to repay an additional portion of the loan amount, up to an agreed limit, annually. These unscheduled repayments can shorten the maturity period or reduce the normal installments.

Repayment rate change

Sometimes it can be useful to choose a loan that allows a change in the repayment rate. This gives the borrower the option of changing the contractually agreed repayment rate and thus the monthly installment in either direction (at least 1%).

Document of compliance

The document of compliance is issued by the tax authority after payment of the realty transfer tax and sent to the notary. It is a prerequisite for property acquisition.

Purchase option

A right to purchase the real estate entered in the land registry or established by contract. This entitles the bearer the right to buy the property instead of another buyer at the same conditions.

Provisional entry

Insertion of a provisional entry in the land registry gives buyers the security that all subsequently entered changes (e.g. change of ownership) are not effective with regard to them.

Fixed interest period and loan term

The fixed interest period is the period in which a particular loan interest rate agreed upon by the borrower with his/her bank is fixed and unchangeable. Typical periods are 5, 10, 15, and 20 years. The loan term, by contrast, refers to the entire term of the loan from payment through complete repayment.

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