Lending limit

Loan-to-Value Ratio - The loan-to-value ratio is the percentage of a property’s appraised value up to which a bank will grant a loan. For mortgage banks (Pfandbriefbanken), the legal limit is 60% of the appraised value (Section 14 of the German Mortgage Bank Act (PfandBG)). In practice, commercial banks and savings banks often finance up to 80% or even 100% of the purchase price - though with increasing interest rate premiums above the 60% limit.

Mortgage Value, Loan-to-Value Ratio, and Loan-to-Value Ratio

Three terms must be clearly distinguished:

• Mortgage value: The sustainable value of the property determined by the bank, which is expected to be realizable even during unfavorable market conditions. It is generally 10-20% below the current market value and is regulated by the Mortgage Value Determination Ordinance (BelWertV).
• Loan-to-value limit: The maximum percentage of the loan-to-value that the bank grants as a loan under senior standard terms-60% for mortgage banks. Above this limit, the loan falls into the subordinated category, which is subject to interest rate premiums.
• Loan-to-Value Ratio: The ratio of the actual loan amount to the mortgage lending value-the higher the ratio, the higher the risk for the bank and the higher the interest premium for the borrower.

Implications for Financing Costs

The loan-to-value limit has a direct impact on interest terms: Loans that fall within the 60% limit (senior collateral) receive the best interest rates-the so-called Pfandbrief terms. Loans above this limit-in the so-called subordinated range-are subject to an interest rate premium of 0.1-0.5 percentage points. Starting at a loan-to-value ratio of 80-90%, the premiums increase significantly, and some banks-particularly Pfandbrief banks-refuse to provide financing or demand substantial surcharges.

For the borrower, this means: The more equity contributed, the lower the loan-to-value ratio and the more favorable the interest rates. Even an equity share of 20% lowers the loan-to-value ratio below 80% and secures significantly better terms-for a loan of 350,000 euros, the interest rate difference over 20 years can amount to as much as 30,000 euros.

Loan-to-Value Limit and the Pfandbrief Market

The 60% limit has its origins in German Pfandbrief law: Banks are permitted to issue Pfandbriefe (covered bonds) for refinancing-but only if the underlying mortgages fall within the 60% limit (Section 14 of the Pfandbrief Act). Covered bonds are considered a particularly safe investment and enable banks to obtain low-cost refinancing, which they pass on to customers in the form of low interest rates. The covered bond market is one of the largest and oldest capital markets in Germany-and the 60% limit is thus one of the stabilizing fundamental rules of the German real estate financing system.

Loan-to-Value Limit, Loan-to-Value Ratio, and Interest Rate Gradation - Overview

Loan-to-Value Ratio	Relation to Appraised Value	Interest Rate Premium (typical)	Bank Refinancing
up to 60%	Senior (Real estate loan limit)	No premium	Covered bond issuance permitted
60-70%	Above real estate loan limit	+0.1-0.2% p.a.	Banking book equity
70-80%	Normal financing range	+0.2-0.4% p.a.	Banking book equity
80-90%	Increased-risk range	+0.4-0.8% p.a.	Increased capital (CRR)
90-100%	High loan-to-value	+0.8-1.5% p.a.	Only a few institutions
over 100%	Unsecured portion	Individual / Rejection	Very rare, special-purpose banks

Practical tip for homeowners in Nuremberg and Franconia

We recommend that buyers in the Nuremberg metropolitan area use the loan-to-value ratio-not the purchase price-as a reference point when planning financing. Banks typically set the mortgage lending value 10-15% below the purchase price. A purchase price of 400,000 euros, with a mortgage lending value of 350,000 euros and a 60% limit, results in a first-lien secured loan amount of only 210,000 euros. For the remainder, you will need equity or a subordinated loan with a higher interest rate. Compare offers from several banks, as the determination of the loan-to-value ratio and the fee structure vary significantly-a mortgage broker can obtain and structure offers from a wide range of banks.

Frequently Asked Questions

Can I finance beyond the loan-to-value limit?

Yes, many banks offer financing up to 80%, 90%, or even 100% of the purchase price. However, as the loan-to-value ratio increases, the interest premium rises significantly, and the bank typically requires a higher initial repayment, additional collateral (e.g., a guarantee, life insurance, or an additional mortgage), or an exceptionally good credit rating from the borrower. Full financing is possible for buyers with very good income and stable employment, but it is more expensive than equity-based financing.

Is the mortgage lending value equal to the purchase price?

No, the mortgage lending value is generally lower than the purchase price. The bank determines the sustainable value of the property based on conservative assumptions and does not factor in speculative price increases. In overheated markets or for properties with special features, the difference between the purchase price and the loan-to-value ratio can be particularly large-in these cases, the buyer must contribute more equity than expected.

How does the loan-to-value limit affect my equity requirement?

If you are aiming for top-tier financing within the 60% loan-to-value limit, you will need at least 40% of the loan-to-value ratio plus the total closing costs (approx. 8-12% of the purchase price) as equity. For a purchase price of 400,000 euros, with a loan-to-value ratio of 350,000 euros, this would already amount to approximately 165,000-180,000 euros in equity. Most buyers in Nuremberg finance their purchases with a loan-to-value ratio of 70-80% and need 25-35% equity relative to the purchase price, including closing costs.

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