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Mortgages in Germany

No matter where in the world you might consider buying property, taking on a mortgage represents one of life's great opportunities to benefit from owning your own home or investment property but it also represents for most people the largest and longest term debt they will take on.

So getting the right structure and repayment schedule for you is highly advisable.

But what is a mortgage? Well at its simplest it is an amount of money advanced by the lender (e.g. bank, building society...) towards the price of a property, land or building/renovation. The lender will normally have ownership of whatever has been lent on. The mortgage is repaid over an agreed period of time, together with added interest and other costs. Once the loan is repaid the property belongs to you.

Sounds straight forward doesn’t it? But you have to remember that a mortgage is also a legal agreement (a loan). A failure repay of the loan can have consequences such as repossession of the property. This can also affect your ability to borrow money in the future.

We have seen many cases around the world in recent years of properties being repossessed due to in large part ill advised mortgage and repayment structures. In Germany however we have not seen this type of problem, mainly because of the conservative nature of German lenders.

For many expatriates who think about taking a German mortgage this mindset can be a little irritating. Coming from the UK or the US we are not used to what may seem as almost inquisitorial questions on our personal/financial situation.

Why do they do this? Well, any German lender will not only asses the value of the property that is going to be mortgaged but also - and this is just as important - the "value" of the mortgage-taker.

So let us be more specific on what factors have an influence on the evaluation of a mortgage-taker:

There is of course your income situation. Do you have a regular stable income and is this income enough to cover all your outgoing costs including future mortgage rates?

Are you in employment or self-employed? If you are in employment are you still within you probation period or do you maybe have a limited work contract? Both factors can be an obstacle when it comes to lending.

Should you be self-employed most lenders would want to see your German records (e.g. tax-statement, book-balancing...) over the past three years. No less!

Age is also a factor as the closer you are to retirement the greater the risk assessment from the lenders point of view.

Another major point is other debts that may be running. This could be another mortgage as well as the lease on a car or the instalments for a new TV. The more debts - even small ones - you have running the lower your mortgage rating may be.

Last but not least of course all of your positive financial assets will be taken into account and increase your positive rating. Assets can include:

  • Bank Deposits
  • Building Savings Contracts (Bausparverträge)
  • Stocks & Funds
  • Certain Pensions & Life Insurances
  • Income from Investments and other sources

It is quite normal for German lenders to expect you to pay around 20% of the purchase out of your own pocket. This of course does not include closing costs. However, 100% loan to value mortgages are obtainable with the right circumstances.

Understanding the main types of mortgages that are offered in Germany can be a good place to start.

Fixed Interest Loans - Capital & Interest Repayment:

This is perhaps one of the most common types of property loan in Germany. With this type of loan the instalments are the same amount throughout the repayment period. To begin with the interest portion of the instalment is high and the repayment portion of the instalment is low. As the loan is repaid the interest portion decreases and the loan repayment portion increases. The client can decide on the percentage for the annuity (in general no less than 1% - normally referred to as "Tilgung") as well as the runtime of the loan. Clients can also decide whether they wish to make additional down payments of the loan (no more than 10% p.a. - normally referred to as "Sondertilgung"). Should the loan not be repaid by the end of the fixed runtime there will be the need for a follow-up-financing.

Interest Only Loans (Zinszahlungsdarlehen):

With this type of loan only the interest portion of the loan is repaid over a fixed term. This can make the repayments seem quite low. But of course the full amount of the outstanding capital of the loan is still due for repayment at the end of the term. Still this type of loan can be very interesting for investment buyers should they be German tax payers as the interest payments can be tax deductable. Should this type of loan be taken for long term mortgage funding then it is highly recommendable to make sure that other savings or assets can cover the outstanding loan at the end of the term.

Building Society Loan (Bausparvertrag):

Often you will find that an annuity loan is linked to a building society savings programme (Bausparvertrag). The instalments to be made are in part (or in total) paid into the savings programme which will be used at a later stage to pay off the mortgage. This type of loan is still popular in Germany and is promoted strongly by banks and building societies. We would however sound a note of caution with this type of loan as they tend to have quite a number of fees connected.

Variable Rate Loans (Flexibles Darlehen):

In this case the interest rate tracks the appropriate base rate, in Germany the Euribor (Euro Interbank Offered Rate), and is adjusted accordingly every three months. Once the Euribor-rate increases, the interest which has to be paid increases as well as vice versa. When someone decides to opt in for a mortgage based upon an adjustable interest rate (also known as a floating rate or variable rate mortgage), they are informed beforehand that they will pay the Euribor-rate plus an adjustment, for example Euribor +1%.

This type of loan in Germany has a number of options. A partial or full repayment of the loan can be made in general every three months. Also in many cases the loan can be turned into a fixed interest and repayment loan if necessary.

A variable rate loan can be a useful option for mortgage provisioning providing of course that Euribor is at a low rate. A close eye has to be kept on the development of the Euribor-rate at all times.

Last but not least - if you live in Germany and are a German tax payer - there are several state supported programmes that can come in useful should you wish to buy a property or build your own. Below you find two of the most important examples of such programmes.

Riester Pension Programme (Riester Rente):

The "Riester-Programme" is a state-run aid for private and company pension schemes. The German "Altersvermögensgesetz" (Retirement Savings Act) defines all the details and conditions. With this state supported programme the individual shall be motivated to care about his/her pension actively. The state shows support by paying certain amounts and/or guaranteeing tax incentives.

The "Wohn-Riester" can be a part of this and is a contract of loan to buy or build privately used real estate and cooperative shares.

In General everyone who is compulsory covered by the German statutory pension insurance can claim for such a programme. Also each marriage partner who does not have the right to receive aid his- or herself but whose marriage partner complies with the requirements. Additionally, the partners have to be fiscally connected.

KfW (Kreditanstalt für Wiederaufbau) Bank Home Ownership Programme

This is a programme for everyone who wants to buy or build a home to live in themselves in Germany and offers special loan conditions.

What promotional funds are available?

Up to 30% of the overall costs and a maximum of EUR 100,000 can be financed with the KfW loan. The borrower's own contributions are included in the overall cost calculation. Funds from this programme can be combined with the Energy-efficient Construction programme for new buildings.

What are the funds for?

Land acquisition and construction costs or purchase price including ancillary costs such as notary public and real estate agent fees, land transfer tax and purchase of cooperative shares to obtain membership of a housing cooperative

How does it work?

KfW loans can be arranged as part of a mortgage package and most lending institutions can incorporate a KfW loan along with their own package.

In many instances the KfW can provide a lower rate of interest and can have the overall benefit of lowering the mortgage costs.

We would like to point out one last detail. Often we are contacted by clients who were attracted by lending institutes with teaser rates but find that these rates have nothing to do with the final offer they are given. In this case - as in so many others - it is most important to read the small print first.

© FIRST Financial Direct Group OHG, Munich, 2011

Article contributed by First Financial Direct Group OHG

Owning property or land can for many people be one of life¹s best investment choices. FIRST Financial Direct Group is here to help make that choice as beneficial as possible and we will be with you every step of the way. This we can do by having access to some of the best mortgage rates & conditions offered by over 200 German and international lenders. So whether it is your dream home or an investment property you are looking for don't hesitate to contact us. Let us help you make it happen!