03 Sep German Mortgages: A Quick Overview To Debunk Some Common Myths
If you’re looking to stay in Germany for the long haul, this may well be an important topic for you. It’s true that Germany has a fairly prevalent renting culture, and that the German law strongly favours tenants over landlords. However, there are still many good arguments in favour of purchasing your own property in Germany.
Firstly, you won’t have to worry about paying rent during your retirement, or worry about dealing with a pedantic or difficult landlord ever again, which will surely be a relief to anyone! It’s also worth noting that Germany hasn’t had the same kind of “boom and bust” property market common in other countries.
During the last five years we have seen continuously rising pricesin the big seven German metropolitan areas, so many Germans are reconsidering their situation and are deciding in favour of buying aproperty.
With this article, the aim is to guide expats through buying a primary residence in Germany, rather than aid foreign investors to buy rental properties.
Please note that different rules apply if you’re a non-resident of Germany seeking to buy property for investment purposes. This angle is not covered by the following guide, but there is a wealth of material on this subject already available online.
Perhaps because of this wealth of information aimed at foreign investors, a lot of material available online is actually quite misleading to expatriates looking to buy themselves a home. To that end, we’ll begin by examining some common truisms about German mortgages.
It’s difficult to obtain a mortgage – Wrong
This is a common mistruth about obtaining a mortgage in Germany. In reality it’s no more difficult than in any other European country. The misapprehension of this difficulty probably comes from the fact that most Germans only buy one property in their lifetime – if at all. It’s not necessarily the cultural norm to “move up the property ladder” in the same way that Brits or Americans might be used to.
Germans tend to rent for much, or indeed all, of their lives, only deciding to settle later in life when they buy, or oftentimes build, their own family home.
As a result of this, mortgage products aren’t as popular, and there’s not as much need to advertise them, so German culture isn’t as saturated with the concept of mortgages as it is in other countries. The same goes for mortgage advice, which is not as readily available in Germany as it is in other countries where young people more readily aspire to owning property.
Nonetheless, the situation is changing, primarily driven by the booming real estate market in major metropolitan areas. Young people are now diving into property investment earlier than they traditionally would have, and frequently with the necessary financial support of their parents.
It’s also true that German banks don’t lend money as readily as banks in other countries may do. You’ll need a good credit rating, a sound history, and a permanent jobto have any sort of chance of securing a mainstream mortgage product.
In some unique cases, banks may also lend to customers with temporary contracts, especially in branches where this is more typically standard and the professions in question are highly paid or highly qualifies e.g. doctors, university lecturers, software developers. It is also not always a prerequisite for immigrants to have a permanent right to residency if their financial and employment situation is favourable.
This all stems from a certain risk-averse nature towards money in Germany, but it doesn’t make obtaining a mortgage more difficult. It simply means you’ll need to be adequately prepared, and not represent a risk to those lending financial assistance.
You need a large deposit – Wrong
This is a misconception that gets thrown around a lot, and it’s simply not true at all. I’ve seen articles that suggest you need a deposit as high as 30% or even 40% to secure a mortgage. Let me assure you that this is absolute rubbish.
Admittedly, if you’re able to put down a large deposit then you’re going to be a more attractive proposition and thus able to secure the mortgages with the best rates. But that doesn’t mean that you’ll be completely locked out if you can’t offer this much up-front.
A large deposit is by no means essential, and other factors will be much more important in when obtaining a home loan.
But the application is more rigorous – True
This one has a little more validity to it. Reduced demand for mortgage products and the aforementioned tendency for Germans to only buy a home once in their lives means that the notion of “shopping around” for a mortgage isn’t popular in Germany. Germans don’t remortgage every few years in the way that we might be used to. This creates a market with much less competition, and thus a market that’s much less consumer-focused.
This probably leads to the perception that German mortgages are harder to obtain – because lenders aren’t competing for your custom, they are usually much more thorough in terms of check-ups and assurances of your income.
In the UK, for example, the general rule of thumb is that a bank will lend on a 3.5 times multiplier of your gross salary, but this absolutely is not the case in Germany. If you only ask your Hausbank, you’ll only be offered a fairly limited range of choices.
We therefore strongly recommend that you shop around, and employ a brokerage service to help get your head around all the options available. An experienced mortgage broker can give you a quote within a day, if youare willing toshare some basic data.
There is no need to enter reams of personal data into a website. A more structured approach would be to provide some basic data to a mortgage broker, who will then be able to give some guidance on whether or not one would qualify for a mortgage and under what approximate conditions.
The detail can follow later upon the applicant making an informed decision upon whether or not he wishes to proceed further.
As you may expect in a market where people tend to mortgage once, and mortgage for life, German mortgages commonly lock you in for a long period of time.
The most common German mortgages have a fixed rate for 10 years, but it’s not uncommon to see 15 or even 20 year fixed-rate mortgages on offer. 5 years is usually the absolute shortest available option.
There’s an obvious advantage here, in that you’re able to commit to something and budget for a long time into the future with confidence and stability.
The downside is that if you commit at an unfavourable time, then that disadvantageous rate will stick with you for a long time. Should the interest rate fall again, you’ll be kicking yourself for years until it’s time to renew.In a period of high interest rates, it is more prudent to only lock in for 5 years.
Not only this, but you can’t redeem your mortgage early without being subjected to an early termination fee. Banks will only allow you to terminate your contract before the end of your fixed rate period if you wish to sell the property.
Even then, an early termination settlement would be due, which is commensurate to the lost revenue incurred by the bank due to them not being able to realise the returns on investment which otherwise would have been possible from your mortgage payments.
Overpaying & Underpaying
You may be unsurprised to hear that German mortgage payments aren’t hugely flexible.
We might be used to concepts like taking a “payment break” or “payment holiday”, but not so in Germany. It’s almost totally unheard of. That said, if you’re able to make lump-sum equity payments, these can move your repayment rate up or down, or reduce the duration of your mortgage. So there are some options.
German mortgages commonly offer you the option to pay up to 5% of the remaining mortgage value as a lump sum once per year. It is also possible to change your repayment rate (Tilgungsplan or Tilgungsrate): Some banks do offer the option to change your annual repayment percentage within the range of 1% and 10% multiple times during the course of your fixed interest period.
Repayment mortgages are the most common type of mortgage offered in Germany, just as in most other countries. However, there is a subtle difference: In Germany the mortgage agreement often hinges on the percentage of the loan to be repaid annually, (known as the Tilgungin Germany) as opposed to the number of years you have in which to repay the loan.
In the UK, it might be common to see a mortgage configured based on a hypothetical frame of time (usually 25 year), but in Germany, the agreement will prompt you to specify how much of your loan you want to repay each year, with a usual minimum of 2%. This rate will then decide the loan’s length of time.
Due to extremely low current low interest rates, banks typically nowadays insist on a minimum repayment rate of 2% per annum, to ensure that the client is not a financial risk should the rates increase by the time he is due to refinance his mortgage at the end of the initial fixed interest rate.
In current market conditions it is also smart to pay a higher repayment rate, to avoid getting a nasty shock if the interest rate significantly increases before it’s time to remortgage.
Interest Only Mortgages
Interest only mortgage are available in Germany but they are much less common and popular than they are in other, more competitive markets. These won’t be available to you if you’re seeking to borrow a high loan-to-value (i.e. If you don’t have a large deposit to put down).
You’ll have to take out this sort of mortgage with an annuity fund. This reduces the risk of negative equity if you have insufficient collateral to repay the loan once it matures.
Be warned though that you’re very unlikely to find this sort of product at your local bank or through an online mortgage comparison site.
If you’re looking for an interest-only mortgage you may struggle, as these kind of mortgages in Germany are usually offered to investment properties rather than primary residences. This is because mortgage interest is tax-deductible for investment properties, but not for homes.
After reading this, you’ll probably want to take a look into the different options available, and have a play with the different repayment percentages and interest rates to find the best deal for you. There are loads of other mortgage calculators online but I find the one from ImmobilienScouteasiest to use, especially for those of you with limited German. If you’re looking for a free App, I would recommend Tilgungsrechner für Haus- und Baudarlehen for iOS (you can change language to English) and Loan Calculator IQ for Android.