Real estate as an addition - security to get a good interest rate

Hello valued builders,

I have already searched through the forum and, it feels like, through the entire internet here, but I have not really found what I was looking for. That is why I am now turning hopefully to the collective intelligence here and hope for your experience.

We want to build and are, as I think everyone here, facing the big questions of how we can financially manage the project.

The first steps for us were therefore to read up online to get an overview of the costs one typically expects. We listed our income, honestly compared it to expenses, and think we have a fairly good impression of what monthly installment we could afford. Because we will have to fully finance, meaning not 100% but really the whole thing!

Now the classic is that you transfer the acquired plot + house to the bank as collateral for as long as you are repaying the loan. For us as full financiers, this basically means we have to accept correspondingly worse conditions than, for example, someone who can cover the incidental construction costs out of pocket, because the risk for the bank is lower.

Now the whole thing stands or falls with how the bank assesses your creditworthiness, that is, what scoring you end up with. And here is where my question actually starts:

We, meaning my family, own some hectares of farmland that we have leased out. Specifically, this means my mother, who wants to support us with the construction project. We no longer use the land ourselves, except that we receive a bit of rent for it. Therefore, a valid scenario would be to offer this land as collateral to the bank in order to obtain a better credit score and thus better conditions.

On the internet, you read a lot
- on the one hand, that farmland has steadily increased in value over the past decades and thus would be a first-class investment if you could get your hands on such (those who have it usually do not give it up => so it should be a delicacy for the bank, right?)
- on the other hand, that land can be easily pledged as additional collateral for lenders through a land charge / mortgage to obtain better conditions.

But I can’t find anything about whether anyone has actually offered such assets as collateral for a construction project / whether credit institutions accept such as collateral... all just theoretical?!

Has anyone here in the forum had experience in this direction? If so, how much did it affect your conditions? How was your land valued by the credit institution / was, for example, 1:1 of the (average) value determined by the Chamber of Agriculture adopted, or maybe discounted by, say, 20%?

I would be happy to receive input from you.

Best regards Sacul

Hm.... no idea, except for the note that it is not your country, but your mother's.

Before a lot of speculation happens here and you still don't know anything at the end of the week, I would, in your place, discuss something like this with your [Hausbank] to see what options banks can offer here.

An acquaintance of mine also has a lot of farmland but with an old barn and an old parents' house on it, which has already been transferred .. That was worth nothing to the bank because it was very large and the bank feared that they wouldn't be able to get rid of it .. Wish you more luck with that.

Hello!

First, something fundamental in advance. Whether you (or your mother) own farmland does not affect your (credit) scoring, as it is not included there. Even in financing conditions below 80%, your own (somewhat normal) creditworthiness plays only a minor role, unless it contains general taboo criteria. Above that, it becomes relevant.

Your mother's land can of course be used as additional collateral, provided the bank is willing to accept it. With direct banks, you will certainly not find an open door with this, and for large banks it might already be too specialized; at savings banks, you could be successful if it is not one of the large city savings banks, but a regional savings bank with a predominantly rural structure. The greatest success, in my view, is with cooperative, credit union, or even Raiffeisen banks. There you certainly will not find top internet rates, but conditions that potentially appropriately reward the additional security. However, for it to have a meaningful effect, it would have to be more than just 10,000 sqm.

Hello, tell us your financial conditions so we can evaluate your project. Otherwise, I agree with the previous speakers, farmland is a nice to have. As collateral for a better interest rate or to finance higher ancillary costs or furniture, it is only conditionally suitable. Most likely at the house bank that knows your region.

Good morning everyone and thank you already for the information and opinions.

I will try to respond to your questions:

Yes, the land belongs to my mom, but I would prefer a construct along the lines of her having a land charge registered there and transferring it to me, or rather guaranteeing for me exclusively with that (I don’t want her to put her house or anything like that up as collateral... the land would be the lesser risk for us privately, since we no longer farm it ourselves and, in the worst case, the lease would just lapse).

It is indeed about 10 hectares, i.e. 10,000 sqm... so we are not large landowners, that’s true. However, if I trust my online research, the demand for land (also from external investors, not just farmers) is extremely high. This is also reflected in the prices determined by the agricultural chamber.

I quote:
“...purchase prices for farmland are rising again. Last year an average of 44,531 euros per hectare was due (= 4.45 euros per sqm), reported the State Statistical Office yesterday. That was a solid 15 percent more than in 2015...”

There are (not quite regularly) data since the 1970s showing prices around €12,800/ha which have only climbed in one direction ever since.

Specifically, I had hoped that the increased demand (meaning it can be resold / turned into cash easily => a good criterion for the bank) and therefore the high and stable value would have a significant effect on the conditions. 10 ha at about €40k would already be €400k, which roughly corresponds to the sum we plan to finance.

At this point, I apologize if I mixed up the terms (creditworthiness)... as I said, we are just starting out and I am simply not yet very confident. So, many thanks for the correction.

The tip to talk to local banks is not bad, but I have moved away from home for professional reasons and would have to see when I could make an appointment there. Basically, I would pick up the phone and have a few calls.

Today I have an appointment at my employer’s employee bank (I work in IT here) and we will do some calculations... I think then I can give you a much more informed insight into my personal circumstances. So I would like to postpone the answer to this question a little, but I would already like to thank you for offering to help me also in this regard.

Best regards
Sacul