Additional security

Supplementary collateral refers to additional security that a borrower provides to a bank in addition to the primary collateral (usually a mortgage on the financed property). It is required when the bank considers the primary collateral insufficient to fully cover the default risk-for example, in cases of high loan-to-value ratios, poor creditworthiness, or particularly high-risk properties. Typical forms include guarantees, life insurance policies, securities accounts, or additional mortgages on other properties.

When does a bank require additional collateral?

When granting real estate loans, banks focus on the loan-to-value ratio: the ratio of the loan amount to the appraised value of the property. If this ratio exceeds 80%, borrowers are in a higher-risk category; for ratios above 90%, many banks strictly require additional collateral. Banks may also insist on additional collateral despite an adequate loan-to-value ratio if the borrower has an unstable income (self-employed individuals, temporary employment) or if the property is difficult to market (specialty properties, rural locations).

The loan-to-value limit of 80% of the mortgage lending value is not equivalent to 80% of the purchase price. The mortgage lending value is determined conservatively by the bank and is often 10-20% below the purchase price-especially for properties in locations with expected price fluctuations or for existing properties in need of renovation. So, if you buy a property for €400,000 and the bank sets the mortgage value at €330,000, a loan of €320,000 already represents a loan-to-value ratio of nearly 97%-and you will likely be unable to close the deal without additional collateral.

Forms of Additional Collateral

The most common forms of additional collateral in real estate financing are:

• Guarantee: A third party (e.g., parents, siblings) is liable for the loan in the event of default. A direct guarantee is standard, whereby the guarantor can be held liable immediately and directly.
• Life Insurance: The cash value of a capital-accumulating life insurance policy is assigned to the bank. The cash value must be sufficiently high to be accepted as collateral.
• Securities account: A securities account is pledged; in the event of insolvency, the bank gains access to the securities held therein. Fluctuating account values make this collateral less predictable from the bank’s perspective.
• Additional Land Charge: A subordinate land charge is registered on an additional property (e.g., one owned by the parents or a property that has already been paid off).
• Building Savings Account Balance: The balance of an existing building savings account is assigned as collateral-particularly attractive because building savings balances represent stable values.

Impact on Terms and Financing Structure

If a borrower provides additional collateral, they can typically negotiate more favorable terms: The bank views the overall risk as lower and passes this on, in part, in the form of a lower interest rate. Even an interest rate advantage of just 0.15-0.25 percentage points adds up to savings of 6,750-11,250 euros on a 300,000-euro loan with a 15-year fixed-rate period-an amount that in many cases exceeds the costs of providing the additional collateral.

At the same time, the borrower ties up their own capital or that of third parties in the financing-which comes at the cost of flexibility. A life insurance policy used as collateral is no longer available as a free reserve. A parent who grants a subordinate land charge is liable with their property-a significant personal obligation. It is therefore advisable to clarify the release provisions before providing additional collateral: Under what conditions will the additional collateral be released? At what repayment level or property value does the need for it cease?

Subordinated Land Charge as an Intra-Family Solution

In practice, a subordinated land charge on a parent’s property is one of the most common intra-family solutions. It allows parents to help their child with financing without having to provide liquid funds. Prerequisite: The parents themselves are not heavily indebted, and the land register right to be registered has sufficient priority after the existing bank land charge. The registration is performed by a notary and incurs notary fees as well as land registry fees-typically about 1-2% of the registered land charge amount.

Important: Parents who provide such security must be aware that, in the worst-case scenario (default by the child), their property may also be foreclosed upon by the bank. A written agreement between parents and child regarding the assumption of liability and, if necessary, mutual protection is advisable-even if it feels uncomfortable to discuss such scenarios within the family.

Practical Tip for Property Owners in Nuremberg and Franconia

Younger buyers in Nuremberg, in particular, who have not yet saved up a significant amount of equity, often find themselves in a situation where they must provide additional collateral. Parents who own their own property can help by providing a subordinate mortgage-without having to use their own liquid funds. We recommend carefully reviewing such arrangements in advance and informing all parties involved about the risks and liability implications.

In the Nuremberg metropolitan area, purchase prices in central locations-Old Town, Gostenhof, St. Johannis-have risen significantly in recent years, meaning that even high-income buyers are increasingly facing high loan-to-value ratios. Our recommendation: Obtain several financing offers early on and determine which bank offers the most attractive overall solution with what additional collateral. Our network of financial advisors and notaries in the region is available to assist you.

Frequently Asked Questions

Can I replace a guarantee with my own equity as additional collateral?

Yes. The more equity you contribute, the lower the loan-to-value ratio-and the less likely it is that the bank will require additional collateral. Equity is generally the simplest way to improve your collateral situation, as no third parties are involved and no additional rights or liabilities arise.

Is the additional collateral released after partial repayment of the loan?

That depends on the individual case and the contract with the bank. If the loan-to-value ratio falls below the critical threshold-usually 80% of the mortgage value-due to repayment or an increase in the property’s value, a request for release can be made. However, banks are not obligated to release collateral early. It is advisable to set forth the release conditions in writing at the time the contract is signed.

What happens to the guarantee if the borrower fails to make payments?

The guarantor is then liable to the bank for the full amount guaranteed. In the case of a directly enforceable guarantee (often required), the bank can hold the guarantor directly liable without first having to pursue foreclosure against the borrower. This is a significant liability risk that guarantors-especially parents and close relatives-should fully understand before signing.

Can I use term life insurance as additional collateral?

A pure term life insurance policy (without capital accumulation) pays out only in the event of death and has no ongoing cash value-it is therefore not suitable as bank collateral. Banks generally accept only capital-accumulating life insurance policies or annuity insurance policies with a sufficiently high cash value. Term life insurance is nevertheless very useful for securing the financing itself-it protects the surviving dependents from an unmanageable debt burden.

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