Financing costs

Financing costs include all expenses incurred in connection with obtaining and maintaining a mortgage-that is, in addition to the actual loan interest, they also include one-time fees, commitment fees, account maintenance fees, and costs associated with collateral. For landlords, financing costs are tax-deductible business expenses; for owner-occupiers, they are not deductible.

Components of Financing Costs

Financing costs can be divided into recurring and one-time costs:

Recurring Financing Costs:

Cost Type	Description
Loan Interest	Main cost category; price for the borrowed capital
Commitment interest	Interest on loan capital not yet drawn down (from approx. months 3-6)
Account maintenance fees	At some banks, for loan account management
Repayment insurance	Optional insurance to secure the loan (e.g., disability)

One-time financing costs:

Cost type	Typical amount
Processing fee	Often no longer permitted (2014 Federal Court of Justice ruling), but be careful with older contracts
Land charge registration (notary)	Approx. 0.1-0.2% of the land charge amount
Appraisal costs / valuation fee	€200-500 for the bank’s mortgage lending value appraisal
Early repayment penalty	In case of early repayment: up to 3% of the remaining debt

Annual Percentage Rate (APR): The legally required comparative interest rate under the Residential Mortgage Credit Directive (§ 6 PAngV) includes all known one-time costs and allows for the comparison of different offers.

Tax Treatment

For landlords, financing costs are fully deductible as business expenses against income from renting and leasing (§ 21 EStG):

• Loan interest: fully deductible
• Commitment fees: deductible
• Notary and land registry fees for land charge registration: deductible
• Discount (deduction from the nominal amount): deductible, provided it is customary in the market

For owner-occupiers, financing costs are not tax-deductible-unless the building is used partly for commercial or rental purposes.

Financing Costs Compared: What Buyers Often Overlook

When comparing loans, many buyers focus exclusively on the nominal interest rate and overlook cost items that significantly increase the effective annual interest rate. The following are particularly often underestimated:

Commitment fees for new construction: If you finance a house in multiple construction phases, you do not draw down the loan all at once. The bank charges commitment fees on the portion not yet disbursed, typically ranging from 0.1 to 0.25 percent per month starting from the third to sixth month. For a construction project lasting 18 months, this can add up to several thousand euros in additional costs.

Disagio: Some banks offer a low nominal interest rate but require a deduction from the loan amount (e.g., a 2% disagio). Economically speaking, the disagio is prepaid interest and must be included in the effective annual interest rate.

Costs for Additional Collateral: Anyone who subsequently provides additional collateral or changes land registry entries will incur notary and land registry fees again.

Total Cost Calculation: More Than Just the Monthly Payment

A complete total cost calculation for real estate financing takes into account:

• All interest payments over the term until full repayment
• One-time financing costs at closing
• Potential prepayment penalties in the event of refinancing or sale
• Costs of follow-up financing after the fixed-rate period expires

Anyone taking out a loan today with a ten-year fixed-rate period should always consider what will happen with follow-up financing-especially if interest rates have risen by then.

Practical Tip for Homeowners in Nuremberg and Franconia

We recommend that buyers in the Nuremberg metropolitan area always use the effective annual interest rate as a benchmark when comparing financing offers-not the nominal borrowing rate. The effective annual interest rate includes all known costs and makes offers from different banks comparable. Commitment fees, in particular, are often overlooked: Anyone financing a new construction project where the loan is drawn down in multiple tranches often pays commitment fees on the undrawn portion as early as the third month. An independent mortgage broker can help identify and optimize these hidden costs. In the Nuremberg metropolitan area, purchase prices have risen in recent years, which has also driven up absolute financing costs-carefully comparing offers from at least five to ten financial institutions is therefore more important than ever.

Frequently Asked Questions

What is commitment interest, and how can I avoid it?

Commitment interest is charged on loan amounts that have already been approved but not yet drawn down. For new construction projects, the bank may charge commitment interest (0.1-0.25% per month) after 3 to 12 months, depending on the contract. You can avoid or minimize these fees by: choosing a bank with a long grace period, ensuring construction progresses as quickly as possible, or drawing down the funds early.

Can the bank still charge a processing fee for real estate loans?

No. The Federal Court of Justice ruled in 2014 that processing fees for bank loans are impermissible (under the law governing general terms and conditions). Fees already paid can be reclaimed, provided the statute of limitations (3 years) has not expired.

How much is a typical prepayment penalty?

The prepayment penalty is based on the bank’s lost interest income (loss due to lower interest rates) over the remaining fixed-rate period, the outstanding principal, and the current market interest rate. As a rule of thumb: The longer the remaining fixed-rate period and the higher the agreed-upon installment compared to the current market rate, the higher the penalty.

Do financing costs also apply to a follow-up loan?

Yes, absolutely. Depending on the bank, costs may also arise with a follow-up loan: for a new mortgage assignment, potential appraisal fees, or notary fees in the event of a change in creditor. We recommend obtaining offers early-at least six months before the fixed-rate period expires-and comparing the total costs, including all ancillary fees.

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