What you should know about mortgages in Germany
Updated August 2022
- What factors determine whether you will get a mortgage in Germany?
- LTV and LTI – two important figures for mortgages in Germany
- What types of mortgages can you get in Germany?
- Special types of mortgages in Germany
- Specifics of buying a house in Germany you should be aware of
Germany is a country of renters: 58% of Germans live in rented housing rather than in their own homes. This low home ownership rate is hard to understand for outsiders, especially since there are a number of things that speak in favor of buying a home in Germany: Although interest rates for mortgages have risen recently, in international comparison they are still among the lowest. Longer fixed interest rates are also very attractive in Germany, especially the 10-year fixed rate. Moreover, you can get very large sums financed here, and in some cases, you can even obtain full financing, i.e. including the purchase costs.
Another advantage is that, unlike in many other countries, you don't pay any capital gains tax if you sell your home and have owned it for more than 10 years – and just 2 in case you lived there yourself.
What factors determine whether you will get a mortgage in Germany?
The general conditions for buying a property and financing it with a loan are very good in Germany. However, German banks are quite risk-averse when granting loans.
The following two points are rather crucial when banks examine a mortgage application:
- Your net household income, i.e. your net income after taxes and other legally required expenses like debt payments and alimony have been deducted. Generally speaking, your monthly payment should not exceed 40% of your net income.
- Your savings, or the amount you can bring in as down payment towards your mortgage. As mentioned in the beginning, it is possible to do a full financing in Germany under certain circumstances, but usually, you should be able to pay at least the purchase costs with your equity. Depending on the federal state you live in, and whether you use a real estate agent, these costs can range from 5% to 15% of the purchase price of the property.
Your age also plays a role in the banks' assessment. In general, banks want you to pay off your loan before you retire, but there are also solutions for people closer to retirement. In any case, the younger you are, the more time you have to repay your loan – and the lower your monthly payment can be.
And finally, your residency plays a key role in the loan decision: It is easiest for German citizens, EU citizens and others with a permanent residency to obtain a loan from German banks. They can finance up to and above the purchase price of the property. It is also usually possible with a Blue Card, but fewer banks are willing to take you on. Somewhat more difficult is the situation for expats who have only a temporary residence permit. They usually need to bring 30-40% own capital.
Your residence status also affects the maximum amount of loan you will receive from a German bank:
LTV and LTI – two important figures for mortgages in Germany
These two abbreviations are important to know when considering mortgages in Germany: LTI and LTV, i.e. loan-to-income and loan-to-value. The first is the ratio of the loan to your monthly net income, the second is the ratio of the loan to the value of the property you want to buy.
For both of these ratios, banks in Germany have upper limits up to which they will approve financing. These limits vary depending on your residency status. For example, as a Blue Card holder, you can get a loan up to a maximum LTI of 100, i.e. a maximum of a hundred times your net salary. At the same time, the LTV must not exceed 90-100%, so you must have at least enough savings to cover the costs of the purchase. To find out how much you can afford, you can use this German Mortgage Calculator.
What types of mortgages can you get in Germany?
As elsewhere the standard type of mortgage in Germany is an annuity loan. This is a loan with a monthly repayment, which is always the same amount. In other words, you pay each month the same sum but what changes over the period of repayment is the composition of your monthly rate: if at the beginning you pay more interest than loan repayment, this ratio reverses over time.
What's special about a German annuity loan is that when taking out the loan, you specify the monthly repayment that you will make, not the total term of the loan. E.g. you can propose to repay 2% of the loan, and this then determines when you have repaid your loan. In order to reduce the repayment period, you can usually make 5-10% additional payments without any penalty.
You can also choose between different fixed interest periods. The longer the fixed interest period, the higher the interest rate. It is therefore necessary to weigh the security of a long fixed interest rate against the disadvantage of higher interest costs. This calculator shows you how the monthly rate and the selected fixed-interest period will affect the total costs of your mortgage and your repayment plan.
Special types of mortgages in Germany
Besides the usual annuity loan, there are a few special types of mortgages that may be attractive to you depending on the circumstances:
- Subsidized loans by Kreditanstalt für Wiederaufbau (KfW)
The KfW is a public bank that supports the purchase of residential property. In particular, for your own first home in Germany, KfW grants loans through various subsidy programs at more favorable conditions than you can get from other banks. However, these loans are always linked to certain conditions and also have an upper limit. But these loans can often help you to get better conditions from the commercial bank you use for the rest of your financing. A good mortgage broker helps you to figure this out and coordinates the application.
A Bausparvertrag, literally translated as a „housing-and-savings-contract“ is a contract that combines a savings agreement with a real estate loan. Such a contract can be useful if you currently do not have enough savings, and if you want to lock in the interest rate for your future house already. In times of rising interest rates, as we are currently experiencing, this can be quite useful. You can also secure a very long-term fixed interest rate with a Bausparvertrag at good rates. However, as a drawback, there are higher closing fees and low returns on your savings associated with the contracts. It is therefore important to weigh up whether a Bausparvertrag is worthwhile for you.
Wohn-Riester is a form of state subsidy for pension savings. You can use your Riester savings as a down payment for owner-occupied real estate or pay off your mortgage. However, the subsidies are modest (especially if you have no children or only a modest income, or don't save a lot)), and not everyone wants to do the paperwork. It also pays mostly if you keep your own home till deep into retirement. The good news: this can be any own home you occupy in Germany or another EU country. However, given the conditions, it is clearly not for everyone.
Specifics of buying a house in Germany you should be aware of
- The demand for properties in Germany is nowadays greater than the supply, especially in large cities and metropolitan areas. So it is a seller's market. So once you have found a property you like, you have to move fast. A financing certificate that banks or mortgage brokers can provide you with will help you stay ahead of the competition.
- It is not uncommon to pay a reservation fee to get priority. But more and more sellers skip this and go only by who makes the fastest offer to buy. Working with a credible mortgage broker helps to reserve the property and get financing as quickly as possible to complete the purchase.
- As mentioned above buying a property in Germany has relatively high upfront costs of 5- 15%. This offsets some of the advantages of the low interest rates. You should plan to live in the property you want to buy for at least 3 to 5 years to redeem these costs.
Buying a property and taking out a mortgage are always major decisions. In Germany, this is further complicated by a rather complex and bureaucratic process. It is therefore advisable to make use of professional assistance. A competent mortgage advisor will support you in this process, show you your options and help you understand what fits best for you and your situation.
This article is contributed by Hypofriend. Hypofriend is the expat-friendly mortgage broker that helps you not only to make a smart mortgage decision, but supports you on the whole journey to your dream home from setting your budget, to finding the right property, and finally signing the mortgage and purchase contract.