Subsequent Collateralization in Real Estate Financing
When Additional Collateral May Be Required and How the Process Works
When you finance a property, the bank checks your collateral before approving the loan. In doing so, they consider various risks and ultimately reach a conclusion.
Nevertheless, there is something called subsequent collateralization (“Nachbesicherung”) during the loan term. If the bank makes use of this option, it can demand additional collateral from you as the borrower. Below, you’ll find a detailed explanation of what subsequent collateralization is, in which cases it is possible, how the process works, and when you should start to worry.
- Definition
- Process
- How to Avoid It
- Your Rights
- Summary
- FAQ
What Is Subsequent Collateralization?
When you take out real estate financing with your bank, certain forms of collateral are agreed for the loan amount—such as a land charge on your property. If these collateral items are no longer sufficient for the bank, it may demand additional security under certain circumstances during the loan term. This process is known as subsequent collateralization and is regulated in Section 490 of the German Civil Code (BGB).
The reason the bank is granted this right—despite reviewing your financial situation and collateral beforehand—is that financing typically spans 20 to 30 years. Over such a long period, the market or your personal situation can naturally change. In certain cases, the bank then has the right to request additional collateral.
When Can the Bank Request Subsequent Collateralization Under Section 490 BGB?
When you take out financing, the bank reviews everything beforehand and grants a loan only if, on the one hand, it considers you creditworthy based on your income and if, on the other hand, the value of the property is in a reasonable proportion to the loan amount. For more on this, you can check out our article on the loan-to-value ratio or listen to our episode on mortgage lending value. 👇
Of course, your situation and the value of the property can always change. Accordingly, there are two scenarios in which banks may request subsequent collateralization:
Either your property loses value or a loss in value is imminent …
… or your financial situation worsens or a deterioration is imminent.
If property values in the area around your asset are declining, the bank may interpret this as a potential threat to the value of your own property. But as you know from our content on the loan-to-value ratio, banks already calculate property values very conservatively and deduct around 20% when determining the lending value.
Naturally, the bank also checks your financial circumstances before approving a loan. What exactly do they check? They compare your income with your expenses, assess your employment status, and review your SCHUFA record to see whether you have always repaid previous loans.
If your financial situation worsens—for example due to temporary unemployment—the bank may request subsequent collateralization. That’s why it can sometimes be smart not to take out your property financing with the same bank that handles your salary account. If you’re looking for the right lender for your financing, our experts are happy to help. 👇
How Does Subsequent Collateralization Work?
So what does the process look like if it really comes to that? It takes place in three steps:
The bank first requests subsequent collateralization from you.
You now have to take action within the deadline set by the bank by upgrading your property or providing the bank with additional equity, building savings contracts, or insurance policies as collateral.
If you miss the deadline, the bank has the right to sell your property via foreclosure.
The bank then has the right to terminate your loan agreement. If you ever find yourself in a situation where you may be unable to make your payments, it is always wise to approach the bank early. Often, temporary solutions can be found. But there are, of course, earlier measures you can take to prevent the need for subsequent collateralization altogether.
How to Prevent Subsequent Collateralization
There are a few levers you can pull to counteract the risk of additional collateral being required from the outset. Here are the five most important tips in brief:
Use equity: If you have some equity, use part of it. The higher your equity ratio when buying a property, the better the bank’s interest conditions for you—even though it's also technically possible to acquire financing without equity capital. But be careful: using too much equity on an investment property is often not the most advisable either. It’s best to get advice from our experts.
Build your real estate financing with a buffer: Plan your financing so that, even after paying your monthly installment and repayment, you still have some financial cushion.
Make special repayments instead of letting money sit idle: If you accumulate some savings over time, use them for special repayments. Money left in your bank account only loses value.
Borrowers’ Rights in the Event of Subsequent Collateralization
If subsequent collateralization does become an issue, you as the borrower naturally have certain rights, and the bank must comply with specific regulations. Subsequent collateralization cannot occur without a valid reason. The bank must prove that the existing collateral is no longer sufficient or that your financial situation has deteriorated. Only once the bank has provided this evidence may it demand additional collateral.
Moreover, the bank cannot simply spring this on you. It must warn you in advance that your mortgage financing will be terminated if you do not meet the collateralization deadline. If the bank does not inform you properly and set a deadline, any termination of your loan is not legally valid.
Don’t Fear Subsequent Collateralization With the Right Financing
So—is this cause for panic? Of course not. As long as you keep up with your payments and the bank receives its money, you have nothing to worry about. As always with real estate purchases: as long as you have calculated your property purchase—whether for your own home or as an investment—properly in advance, subsequent collateralization is unlikely.
Banks calculate very conservatively and avoid major risks. You can therefore assume that they will grant you a loan only after careful review and always build in enough safety margin. And if you complete your financing through Urbyo, you’ll always have your personal point of contact by your side and can secure your financing with our Perfect Fit Guarantee.