Discount points (“Disagio”) & private property finance: how to make use of tax advantages

When buying a property as a private investment, most buyers use a bank loan in which interest is paid regularly over the agreed term. Besides this, there is another option that is becoming relevant again: the Disagio.

What is a Disagio?

During the years of very low interest rates, Disagios were hardly used. But as mortgage rates increase, more banks are once again prepared to offer them. For private rental properties, a Disagio – when used correctly — can allow buyers to claim a significant amount of deductible expenses in the year the property is purchased or built. This can noticeably reduce the investor’s income tax burden at an early stage.

A Disagio means that the loan is not paid out at its full nominal amount. Instead, the bank deducts a percentage at the beginning. This deducted amount is treated as prepaid interest. In return for paying part of the interest upfront, the borrower normally receives a lower ongoing interest rate on the loan.

Example:

• Nominal loan amount: €300,000
• Disagio (e.g. 5%): €15,000
• Payout amount: €285,000
• Ongoing interest rate: 2.3% (instead of e.g. 3.5% without a Disagio)

In this example, the borrower pays €15,000 in prepaid interest immediately in the year the loan is provided.

Tax advantage: immediate deduction as “advertising expenses”

A key point for private property investors: A Disagio counts as a financing cost, not as part of the property’s purchase price. For rental properties, it is treated as advertising expenses for tax purposes.

Why is this beneficial?

People who rent out a property receive income from letting. From this income, they may deduct:

• interest on the loan, and
• other financing costs,

at the point in time when the payment is actually made.

With a conventional loan, interest is paid gradually over many years. With a Disagio, a large part of the interest is paid immediately – usually in the year of purchase or construction. If the Disagio is considered market-standard, it can usually be deducted in full in that same year. This can significantly reduce the taxable income of the investor. So the Disagio allows a large portion of the interest burden to be brought forward into the first year – creating a strong tax-saving effect.

Note: This also means that interest deductions in later years will be lower due to the reduced ongoing interest rate. This should be taken into account in long-term tax planning.

When is a Disagio “Market-Standard”?

For tax purposes, it is important that the Disagio is considered appropriate for the market. In practice, the following rule of thumb is widely accepted:

• A Disagio of up to 5% with a fixed-interest period of at least five years is normally regarded as market-standard.
• In simple terms: 1% Disagio per year of fixed interest is usually acceptable.

A higher Disagio is not automatically problematic, but it will be examined more closely. In such cases, evidence of comparable loan conditions on the market is advisable.

Who can benefit from using a Disagio?

Disagio may be particularly attractive for buyers of private buy-to-let properties when:

• their income is unusually high in the year of purchase (for example due to a severance payment or business sale),
• they are close to retirement and want to make use of tax advantages while still earning a high income,
• they plan to hold and let the property for the long term,
• their personal income tax rate is medium to high, and
• they take out a loan with a long fixed-interest period (for example 10 or 15 years), with overall sensible economic conditions.

In these situations, a market-standard Disagio can reduce the tax burden significantly in the year of purchase while also lowering ongoing interest payments.

A simple example

You buy a rental flat and finance €300,000 with a bank loan.

Scenario without a Disagio

• Loan amount: €300,000
• Interest rate: 3.5%
• Annual interest: €10,500
• Tax-deductible expenses (simplified): €10,500

Scenario with a 10% Disagio

• Loan amount: €300,000
• Disagio: 10% = €30,000
• Payout: €270,000
• Ongoing interest rate: 2.3%
• Annual interest: €6,900

In the first year, the deductible expenses are therefore:

• €6,900 in ongoing interest, plus
• €30,000 from the Disagio (fully deductible),

Total: €36,900 deductible expenses

That is €26,400 more than in the standard scenario. With a personal income tax rate of 42%, this results in an additional tax saving of around €11,100 in the first year.

Note: The Disagio can even be financed through the loan itself — which means the tax effect can be achieved without using one’s own cash.

Important points to keep in mind

Eine A Disagio can be very helpful, but certain conditions must be met:

Proof of being market-standard
For Disagios above 5%, documentation is essential. Comparison offers from other banks are useful.

Clear connection to the rental property
The loan must clearly relate to the purchase, construction, or refinancing of a rental property.

No personal use
For owner-occupied properties, these deductions are not available.

Overall economic suitable
Taxes are only one part. Interest rate, repayment, rental yield, equity, and investment horizon must also work together.

Conclusion: a Disagio can offer valuable tax benefits for private buy-to-let purchases

Das With rising mortgage rates, the Disagio is experiencing something of a revival. More banks are offering this structure again.

From a tax perspective, a market-standard Disagio can be a highly effective tool when financing a private rental property. It allows a sizeable portion of financing costs to be deducted immediately in the year of purchase, often resulting in a clearly noticeable tax reduction.
Whether a Disagio is suitable — and what level makes sense — depends on the individual case. A tailored calculation is essential.

Our services for you

Das TThe topic of Disagio financing is of course also part of our advisory work. We are pleased to support you

• in structuring the financing of your investment property,
• in assessing whether a Disagio is suitable for your situation and, if so, in what amount,
• in the tax classification and documentation required for submission to the tax authorities, and
• in the long-term tax planning of your property investments.

If you are planning to purchase a property or restructure an existing loan, please contact us at an early stage. The sooner we are involved, the better we can help you make use of the available tax planning opportunities.

Please note: This article does not constitute personalised tax advice. It provides only a general overview of the tax treatment of Disagio arrangements for investment properties. Individual advice tailored to your specific circumstances is always necessary.