Pre-financing
A short-term loan granted by credit institutions, usually over a period of 1 to 2 years, is referred to as pre-financing. The loan is granted even though the final financing of the project is not yet secured. Pre-financing is required when, for formal reasons or due to sudden time pressure, secured full financing is not possible. In such cases the credit institution takes on a higher risk because the later financing of the project is not guaranteed and the repayment of the pre-financing may also be in question. Pre-financing frequently occurs in the context of a business acquisition, where it is referred to as bridge financing. This bridge financing is often requested when the purchase of the company is under such time pressure that a solid financing arrangement could not be prepared. To give the buyer the opportunity to prepare a solid financing plan for the purchase, the credit institution grants pre-financing. During the term of the pre-financing the buyer can prepare such a financing plan and convert the bridge financing into a regulated repayment schedule. The term pre-financing is colloquial, as it is usually an interim financing. Even when a tax refund claim is to be financed in advance by a credit institution, this is clearly interim financing, because in that case the repayment of the loan granted is secured by the tax refund. The advantage of pre-financing is that the buyer immediately has the necessary funds to carry out his project. The disadvantage is the pre-financing fee, which, however, is often accepted because of the circumstances.
Pre-financing for construction projects
Pre-financing often occurs in construction projects. Typically this happens when someone has found a favorable property they would like to purchase or when, for other reasons, the construction of a new house should start earlier than planned. In this case an interim financing is requested that lasts until the building savings contract is eligible for payout, usually only a period of 1–3 years. Credit institutions do provide this type of pre-financing because the loan amount granted is secured by the existing building savings contract. The behavior of builders in the area of building savings has changed drastically over the last decade, mainly because there is a new generation of property buyers. This generation wants to buy their chosen property immediately and not wait for the allocation of a matured building savings contract. This motivates the credit institutions to propose pre-financing as a financing option. Through pre-financing the customer can enjoy the advantages of a building savings contract without first having to go through a savings phase. For this purpose a building savings contract is usually concluded that is coupled with pre-financing or the taking out of a loan to enable immediate payout. The savings for the building savings contract therefore take place during the term of the pre-financing. Once the building savings contract is ready for payout, it replaces the pre-financing. This allows the builder either to start immediately with the construction of a project or to purchase the desired property while the actual building savings contract is still being accumulated. To ensure the affordability of the financing solution, the loan that the credit institution has provided for pre-financing is not included in the amortization. Instead, interest is paid until the accumulated building savings contract is paid out. The interest credit that accrues from the interest on the building savings contract is also offset.
Financing tailored to the project
For better risk calculation, pre-financing independent of a building savings contract is now rarely offered. Instead, credit institutions provide special combination products or so-called building-savings constructs for these financing needs, which are offered to interested parties. The advantage is that the customer only needs to conclude a single financing product with their credit institution. These financing products are repeatedly a combination of pre-financing and a building savings contract, with the financing tailored exactly to the desired project. The monthly installment is set at a level so that it remains constant over the entire repayment period. This applies both to the pre-financing and to the building savings contract to be accumulated later. For this reason these financing solutions are also called constant loans among professionals. Constant loans are an innovation in lending that were created mainly to meet the needs of the new generation of builders. Since the introduction of constant loans, customer interest in this financing model has been steadily growing. Today almost all building societies offer these constant loans as a pre-financing model, although the financing approaches of the individual credit institutions naturally differ greatly. Therefore a borrower should seek advice from a knowledgeable advisor about the best financing models for them, including pre-financing.
Financing solution for property purchase
Only a few people can buy a property or build a new house without financing from credit institutions. For this reason loan applications are submitted to credit institutions to obtain the appropriate loans. Lenders still place great emphasis on borrowers being able to cover part of the purchase price with equity. This money should consist of saved assets. Usually credit institutions require an amount of around 10 percent of the purchase price, although it is also possible for credit institutions to finance the purchase amount 100 percent through loans. In that case, however, a term life insurance is usually required as collateral for the credit institutions in addition to higher interest rates. For most interested parties planning to acquire a property or build a house in the future, it is quite feasible to save the required equity, often through a building savings contract. These building savings contracts are even subsidized by the employer as so-called capital-forming benefits. Purchasing a property is also possible when one’s own building savings contract is not yet ready for payout. To still be able to make the purchase immediately, pre-financing is usually carried out. This pre-financing is intended to bridge the time until the building savings contract is fulfilled and can be paid out. There are various financing options offered in connection with pre-financing. In this process the owner of the building savings contract assigns it to the credit institution with which they want to carry out the financing. For this pre-financing the credit institutions usually charge interest payments. In addition there are the installments for the concluded building savings contract as well as the agreed capital-forming benefits. The possible pre-financing of an existing building savings contract benefits both the property buyer and the credit institutions. The buyer can take possession of their project and the credit institutions earn through the loans such as the pre-financing. As state subsidies for home ownership are increasingly reduced, the pre-financing of building savings contracts by credit institutions is playing an increasing role.