Discount

Disagio - A disagio (also known as a damnum) is a discount applied to the loan amount at disbursement, whereby the borrower receives less than the full principal amount but, in return, pays a lower nominal interest rate.

How does a discount work in real estate financing?

If the borrower and the bank agree on a discount, the loan is not disbursed at 100 percent of the face value, but with a reduction. For example, with a loan of 300,000 euros and a discount of 3 percent, the borrower actually receives only 291,000 euros in their account-but repayment is based on the full 300,000 euros. From an economic perspective, the 9,000-euro discount is an advance interest payment.

In return, the bank lowers the nominal interest rate for the term of the fixed-rate period. The borrower thus pays a lower monthly installment but has paid a portion of the interest costs in advance as a lump sum. Whether this is worthwhile depends on the individual situation-the key factor is comparing the effective interest rate. This takes into account both the nominal interest rate and the discount, making different offers truly comparable.

Banks are legally required to disclose the effective interest rate in accordance with the Price Indication Regulation (PAngV). A loan with a discount and a low nominal interest rate can actually be more expensive in terms of the effective interest rate than a loan without a discount but with a higher nominal interest rate. We therefore recommend using only the effective interest rate as a benchmark when comparing financing options.

The opposite of a discount is a premium-a surcharge on the face value, which, however, rarely occurs in real estate financing. In today’s financing practice, loans are predominantly disbursed at 100 percent (i.e., at par). Disagio agreements have become less common, but they still play a role in investment real estate for tax reasons.

Tax Treatment of the Disagio

For investors financing a rental property, the disagio can be tax-advantageous. In principle, the disagio constitutes income-related expenses for income from renting and leasing. The tax treatment depends on whether the discount is classified as market standard.

A discount is considered market standard if it does not exceed 5 percent of the loan amount and the fixed-rate period is at least five years. In this case, the discount can be deducted immediately in full as income-related expenses in the year of payment. If the discount exceeds the market rate threshold, it must be spread over the term of the fixed-rate period-that is, amortized on a straight-line basis.

For owner-occupiers, the discount offers no tax advantage, as interest on an owner-occupied property is not deductible as income-related expenses. In this case, a loan without a discount is generally the better economic choice.

Discount Comparison - Calculation Example: €300,000 Loan (Investment, Marginal Tax Rate 42%)

Option	Amount Disbursed	Nominal Interest Rate	Effective Interest Rate	Discount	Tax Savings (Immediate)	Net Effect
Without discount	€300,000	3.50%	3.50%	€0	€0	Base
3% discount	€291,000	3.20%	3.52%	€9,000	€3,780 (42%)	+€3,780 tax benefit, but €9,000 less liquidity
Discount 5%	€285,000	2.95%	3.55%	€15,000	€6,300 (42%)	+€6,300 tax benefit, but €15,000 less liquidity

Note: A discount of up to 5% is considered standard market practice and is treated as immediately deductible income-related expenses (R 21.2 EStR). For owner-occupiers, the tax benefit is completely eliminated.

Practical Tip for Nuremberg and Franconia

In the Nuremberg metropolitan region, we observe that discount agreements are primarily used for rented investment properties in sought-after neighborhoods such as Gostenhof, St. Leonhard, or the Südstadt. Investors with a high personal tax rate can significantly reduce their tax burden in the year of acquisition through the immediate deduction of income-related expenses. However, we recommend always making this decision in consultation with a tax advisor and considering it not in isolation but within the overall context of the financing. This is because a discount reduces the actual available loan amount-and especially given the increased purchase prices in Nuremberg and the surrounding area, the financing should be calculated thoroughly.

Frequently Asked Questions

What is the difference between a discount and a premium?

A discount is a reduction on the loan principal amount at disbursement-the borrower receives less than the agreed-upon amount. A premium is the opposite: a surcharge where more than the principal amount is paid. In real estate financing, premiums are practically nonexistent, while discounts can play a role primarily in investment property financing.

Is a discount worthwhile for an owner-occupied property?

Generally no. Since owner-occupiers cannot deduct the interest on an owner-occupied property for tax purposes, the main advantage of the discount is lost. The borrower receives less money, but must repay the full amount. Without tax relief, a loan with 100% disbursement and a slightly higher nominal interest rate is more cost-effective in most cases.

How does the discount affect the effective interest rate?

The discount increases the effective interest rate compared to the nominal interest rate, as the lower disbursement is factored into the calculation as an additional cost. A loan with a 1.5% nominal interest rate and a 3% discount has a significantly higher effective interest rate than the 1.5% would suggest. The effective interest rate is therefore the only reliable comparison criterion for evaluating offers with and without a discount.

Back to the Real Estate Glossary.