Follow-on financing

Refinancing is the process of securing additional debt financing during or after a construction project or real estate purchase because the originally planned financing amount is insufficient to cover all costs. It often results from cost overruns during construction, unforeseen defects in existing properties, or an inaccurate initial calculation. Top-up financing is generally more expensive than the original financing, as the loan-to-value ratio has already been exhausted and the bank factors in a higher risk.

Causes of top-up financing

The most common triggers are: construction delays leading to higher labor costs; price increases for materials and trades after the contract is signed; owner contributions that could not be provided as planned; unforeseen site conditions (demolition of old foundations, discovery of unexploded ordnance); and subsequent requests from the client that go beyond the original scope of work.

For existing properties, the need for additional financing often arises from defects discovered only after the purchase: leaky roofs, water damage, dilapidated building systems, or hazardous materials such as asbestos. Those who forego an expert appraisal before purchasing save money in the short term but risk significant additional financing needs in the long term.

Consequences and Risks of Additional Financing

Additional financing almost always comes with less favorable terms: higher interest rates, lower loan-to-value ratios, and stricter contractual conditions. In addition, the bank conducts a new, comprehensive credit check-anyone whose income situation has changed in the meantime risks rejection.

In the worst-case scenario, a lack of liquidity can lead to contractors not being paid, the project coming to a standstill, and the property not being completed at all. An unfinished property is of very limited use as collateral for further loans-a vicious cycle that can be avoided by consistently planning for cost buffers from the very beginning.

How to Avoid the Need for Additional Financing

The best strategy against the need for additional financing is a conservative cost estimate with a buffer reserve of 10 to 15 percent of the total construction cost. Specific measures:

• Fixed-price contracts with tradespeople instead of hourly billing protect against cost increases
• Plan DIY work realistically and only undertake tasks in areas where you have proven expertise
• Technical due diligence on existing properties by an independent expert prior to purchase
• Maintain a buffer reserve of at least 10-15 percent of total costs as a liquidity reserve
• Early cost updates during the construction phase-checking the cost situation monthly allows you to spot cost overruns early

A reputable financial advisor will build a sufficient reserve into the financing plan from the start and alert the borrower to typical cost pitfalls.

Additional Financing Despite Caution: What to Do?

If additional financing cannot be avoided despite all precautions, the rule is: Act early and communicate openly. Most banks are more accommodating to an early discussion than to an unexpected cash crunch just before insolvency. Possible solutions include:

• Extending the existing mortgage with your primary bank
• A subordinated loan through another bank or a private lender
• Short-term bridging through the liquidation of securities or savings accounts
• A private loan from family members with a written contract

In rare cases, a partial sale of a property or a rent prepayment model can also bridge the financing gap.

Practical Tip for Homeowners in Nuremberg and Franconia

In the Nuremberg metropolitan region, we regularly see builders reaching their limits: material costs have risen sharply in recent years, and many cost estimates from before 2022 are now significantly too low. Anyone currently building or buying should plan with a buffer of at least 15 percent above the estimated construction cost.

If additional financing is on the horizon, the rule is: Go to the bank early and communicate openly-the sooner you initiate the conversation, the more room for maneuver everyone involved will have. We can recommend independent financial advisors who develop creative and legally sound solutions even in difficult additional financing situations.

Frequently Asked Questions

Can my primary bank refuse refinancing?

Yes. The bank is not obligated to grant refinancing. It will re-evaluate your creditworthiness, loan-to-value ratio, and total exposure. If the loan-to-value ratio is already high, a refusal or an adjustment of terms is likely.

Are there cheaper alternatives to refinancing?

Possible alternatives include liquidating savings or securities accounts, taking out a private loan from family members, or-for KfW-eligible projects-applying for a subsidized loan. In extreme cases, selling a portion of the property may also be an option to close the refinancing gap.

Does refinancing count as a separate mortgage in the land registry?

Yes. For refinancing, a new land charge is typically established or the existing one extended, which incurs additional notary fees and land registry fees. This further increases the total cost of refinancing.

How much higher are the typical additional costs of refinancing compared to the initial financing?

Refinancing is often 0.5 to 1.5 percentage points more expensive than the original financing because the bank’s residual risk is higher and the loan-to-value ratio has increased. In addition, there are one-time costs for the notary, land registry, and, if applicable, processing fees. A realistic picture only emerges by comparing several offers-even for refinancing, at least two to three offers should be obtained.

Can I cover refinancing through government subsidy programs?

Yes, in certain cases, KfW subsidy programs can be used for refinancing. The KfW program “Federal Subsidy for Efficient Buildings” (BEG) is particularly suitable when the refinancing is due to additional energy-related costs-for example, because the thermal insulation turned out to be more expensive than planned or a heat pump needs to be retrofitted. The BEG subsidy loan generally offers more favorable terms than a subordinated bank loan, as KfW loans can be applied for even after initial financing has already been secured. The prerequisite is that the eligible measure has not yet begun or that the application is submitted in a timely manner. We recommend that, when additional financing for construction measures appears necessary, you always first check whether subsidies are an option before taking out an expensive subordinated loan.

Additional Financing for Developer Projects: Special Considerations

When purchasing a new-construction apartment from a developer, additional financing needs often arise from special requests and upgrades that go beyond the developer’s standard package. Many buyers underestimate the cost of these extras. If the need for additional financing is only recognized after the purchase agreement has been signed, the room for negotiation with the bank is limited. In new construction projects in Nuremberg-such as in the Südstadt district, the area of the former AEG site in Mögeldorf, or in Erlangen-West-special requests (hardwood flooring instead of laminate, higher-quality bathroom fixtures, an enlarged terrace) can quickly add an additional 15,000 to 40,000 euros to the cost. We recommend that buyers coordinate a realistic budget for special requests with their financial advisor as early as the signing of the purchase agreement and factor this buffer into the initial financing.

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