Inflated Down Payment Bonus in Chile: What it is, Why it's Illegal, and its Risks

The so-called "inflated down payment bonus" has transitioned from a marketing tactic to a controversial issue in the real estate market. While some companies present it as a way to facilitate access to housing, its use raises questions about its impact on prices, competition, and proper credit risk assessment.

The "inflated down payment bonus" consists of simulating a sale price higher than the actual one to obtain a larger mortgage. As indicated by the Association of Real Estate Developers (ADI), the declared value to the bank is artificially inflated and a part of the down payment "is not really paid by the buyer," which amounts to a hidden discount and a declared price higher than agreed upon.

In practice, the buyer and seller agree on a value (for example, $100 million), but the bank appraisal comes in higher (for example, $120 million). The inflated amount is recorded in the deed, and the bank grants credit based on it. From the declared amount, the seller only receives the agreed price ($100M), and the difference ($20M) is used to feign the down payment. Thus, part of the mortgage ends up financing costs of the down payment not authorized by the bank.

Example of Simulation

Real agreement: sale price $100M; inflated appraisal: $120M; deed: $120M. If the bank grants 80% of $120M, the credit is $96M. The seller receives $96M from the bank and the buyer pays an additional $4M outside the deed, completing the $100M. For the buyer, the effective down payment decreases (in this example, from $20M to $4M) or may even disappear.

An 80% credit shifts from financing $80M to $96M, meaning $16M of "extra debt". This increases the payments: for example, at 4% annual and 20 years, the payment can rise from approximately $606,000 to $727,000 monthly, adding around $30M in interest over the life of the loan. In summary, by inflating the price, the buyer finances amounts not contributed and the seller claims to have sold for a higher amount than actually received.

Legal and Criminal Risks

• Contract nullity (simulation): Declaring a false price constitutes contractual simulation, which in Chile can be a cause for absolute nullity. The Civil Code prohibits the use of simulated contracts to conceal reality, as real price or consent is absent. The ADI warns that inflating contracts without documented support can constitute forgery and "crimes against public faith". In practice, simulation renders the contract objectively false from its origin and vulnerable to nullity.

• Crime of fraudulent credit acquisition: The General Banking Law (Law 18.010) penalizes obtaining credit with false information. Its Article 160 states that anyone obtaining credit by supplying false or incomplete data risks prison time. Inflating the price so the bank finances more falls under this category, as it induces the bank to lend based on false information.

• Bank liability: A bank executive cannot legalize this maneuver. By regulation, banks must verify the actual down payment and provision according to the real financed value. The CMF requires loan-to-value limits (Circular No. 3.573) and provisions according to the financed percentage. An inflated appraisal distorts the loan-to-value and can constitute a breach of financial regulation. If the bank detects irregularities, it can restructure the credit, demand additional guarantees, or cancel the operation.

Tax and Administrative Risks

• Incorrect tax declaration: The Internal Revenue Service (SII) calculates taxes (VAT, income tax, contributions, capital gains) based on the value declared in the deed. Inflating that value creates a false taxable base and the SII can appraise the property at the real value (Tax Code art. 64, para. 6°) and demand additional taxes. Presenting documents with false information can be penalized with fines, even up to 50% of the omitted tax.

• Notarial and registry controls: Notaries and Property Conservators verify that the deed reflects the reality of the transaction. If they find inconsistencies—overvalued appraisals without justification—they can deny authorization or registration and, in extreme cases, report irregularities. Even if the "paperwork" seems in order, there are controls capable of detecting and stopping the operation.

Consequences for Buyer, Seller, and Bank

• Buyer: Takes on a debt greater than the actual value of the property, with inflated payments for years, equivalent to financing the down payment not made. If they sell later, they may receive less than owed and incur losses. Furthermore, by not contributing a real down payment, the incentive to fulfill the loan decreases, which increases the risk of default, acceleration, or cancellation of the loan if the bank detects the irregularity.

• Seller: Claims to have sold at a price higher than agreed, which can lead to higher taxes (capital gains or VAT) and expose them to claims in lawsuits or processes like divorces. Their apparent wealth increases and the SII may investigate alleged illicit enrichment. Legally, they could be liable for simulation and face lawsuits from the buyer seeking nullity.

• Bank: Although it has a mortgage on the inflated amount, it assumes greater credit risk and must provision according to a higher loan-to-value, requiring additional capital. If it detects simulation, it can demand early repayment of the credit or blacklist the client for future loans. Additionally, its reputation and portfolio may be affected.

Legitimate Cases vs Simulation

There are situations where the declared value differs from the commercial value without fraud: for example, when including properly valued personal property (furniture or appliances) or when the seller has received real improvements from the buyer with invoiced works. It may also happen that the offer is less than the bank’s appraisal.

However, these cases must be documented and justified in the deed. Unreported cash payments, returns outside the contract, or parallel agreements feigning a different down payment are not valid. Any commitment of that kind violates the law, even if it is a common practice.

Legal Alternatives

To facilitate purchase without resorting to the inflated down payment bonus, there are formal options:

• State housing subsidies: programs from MINVU (DS01, DS19, etc.) that provide subsidies for the down payment or interest rate for new or used home buyers.

• Regulated complementary credits: additional loans designed to complement part of the required down payment, without simulation purposes.

• Housing leasing: mechanism that combines rental with a promise to purchase. MINVU promotes programs where interested parties lease with a promise to buy, pay monthly, and can access state subsidies without requiring prior savings; upon completing the payment, the deed is formalized.

• Documented installment down payment: formally agree in the contract that the buyer will pay the down payment in installments, through a bridge loan or promissory notes, all registered or with clear guarantees.

• Real price reductions or discounts: negotiate directly a lower price with the seller, avoiding the simulation of the value.

Conclusion

The inflated down payment bonus is not a benefit, but rather an illegal simulation. Although some present it as a "financial solution," it lacks legal validity. Using it implies falsifying the contract and exposing the parties to serious civil, tax, and even criminal consequences. That it is common does not legitimize it: the law requires transparency in real estate transactions. When in doubt or in need of resources, it is better to seek formal avenues (subsidies, authorized credits) rather than risk committing fraud in the deed.