Buying your own property can be one of the best investments in your life. Getting a mortgage can be scary, as this can also be the largest debt in your life. It is even more overwhelming in Germany due to language barriers and the unfamiliarity with the local process. In this article, you will learn all information about getting a mortgage in Germany. This includes a comparison of some common types of mortgages in Germany; tips when getting a mortgage; the mortgage process when building your new property from scratch, and more.
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The process of buying a property in Germany can be quite overwhelming, especially for expats. Before even looking for your house, you should have some ideas about how much you can afford. So, you can search for a house in your price range.
No matter if you want to buy a house in Germany for yourself or an investment property, the easiest way is to use the below free online mortgage calculator. Just enter the house price, your down payment amount, and some other basic info. You can then see the different mortgage options in minutes.
The advantages of buying your own property in Germany
If you are reading this article, you are probably looking to buy a house in Germany. We bought our house in Germany a few years ago. For us, it is the best investment we have ever had. Below are some reasons why we decided to buy our own property in Germany.
Low interest rate
The interest rate is low at the moment. It means that it is very cheap to buy now. Our colleagues told us that he bought his house 15 years ago and the interest rate was around 5% back then. It was hard to believe! Our mortgage interest rate is about 1% (in 2021).
House price is rising
We bought our house 5 years ago. The same kind of house in our neighborhood costs now 150k Euro more than what we have paid back then. If we didn’t buy our house 5 years ago, we wouldn’t be able to afford to buy one now.
The value of our house is appreciating. We are creating wealth. On the other hand, renting creates no wealth but only expenses.
No need to pay rent
Finding a place to live can be very difficult in Germany, particularly in the big cities. This is because the demand is much higher than the supply, no matter it is for renting or buying.
House price is increasing. Rent is also increasing, especially around the big cities. As a tenant, you won’t know when your landlord will raise your rent. Or if your landlord may kick you out of the flat to move in himself. In that case, you will have to look for a new flat in the open market (with probably much higher rent). Besides, what is your plan after you retire? Do you have enough pension to cover the high rent when you are old?
We can decide everything about our flat
When we rent a flat, we cannot really change anything in the flat. If the flat is ours, we can do almost whatever we like. For example, we are building a guest toilet now in our house. We choose our heating and floor tiles. We have cats.
Buying a property in Germany is not for everyone
Even though for us, buying our own property was a very good investment, it may not be the same for everyone. In the end, it depends on your personal situation. Buying your own property in Germany has its risks too.
Expensive at the beginning
Firstly, you need to pay a high initial investment. Not everyone has that money to start with.
Besides, there are ongoing costs associated with your property. You will need to pay for repairs, maintenance, house management fees, etc.
Even though house price is increasing, no one can guarantee that the price trend will stay so. There are still risks that house prices may fall after you buy your property. Moreover, if you want to sell your property, it may take some time until you find a buyer. So, you cannot cash out very easily.
Taking into account all the pros and cons of buying your own property in Germany, you will have to decide if you should buy or rent based on your personal situation. This article is not an investment recommendation!
Now, if you are interested in buying a property in Germany, let’s have a look at what kind of mortgages are out there.
Disclaimer: Please be aware that this article is intended to provide you with a brief overview of getting a mortgage in Germany. This blog is not qualified to give you any professional financial advisory service according to German law. If you need more details and specific advice on your personal situation, we would highly recommend you to consult a mortgage adviser, a tax adviser, or an estate agent.
Different types of mortgage in Germany
There are many different types of mortgages in Germany. We will talk about some common types of mortgages below.
Note: The below table can be moved sideways depending on your screen.
During the mortgage period, the interest portion you pay will decrease over time. And the capital repayment portion will increase.
Same as an annuity mortgage. But the loan will be fully paid off by the end of the contract.
Pay interest only during the mortgage period. And a full capital repayment at the end of the contract period.
First, save money in a saving account. Then, enter into a mortgage for the rest of the amount needed.
Similar to an annuity mortgage but the interest rate is variable.
Monthly repayment amount
Monthly capital repayment
Not during the saving phase
1) Same monthly repayment amount
2) Stable and good for finance planning
3) Capital repayment monthly
1) Same monthly repayment amount
2) Stable and good for finance planning
3) Capital repayment monthly
4) Your loan will be paid off by the end of the contract period
5) It has usually a better interest rate compared to an annuity mortgage
1) Low monthly payment amount
2) Interest expense is tax-deductible for investment properties
1) Secure the current low interest rate for your future mortgage
2) Flexible use of the saved money
1) Can benefit if the interest rate goes down
2) No penalties payment for paying off the loan earlier
3) Good for temporary financing
1) Long repayment period
2) Cannot take advantage in case interest rate falls in the future
3) Your loan may not be paid off after the contract and a new mortgage may be needed
4) Risk of higher interest rate after the contract ends
5) Penalties payment if you pay off the loan earlier
1) Cannot take advantage in case interest rate falls in the future
2) Additional annual repayment option not possible or expensive
3) Usually a higher monthly repayment amount
4) Penalties payment if you pay off the loan earlier
1) It has usually a higher interest rate compared to an annuity mortgage
2) Need to have other forms of finance to pay back the full loan at the end of the contract
1) Low return on investment during the saving phase
2) Long contract period
3) Usually can only lend a small amount
4) Penalties payment if you ends the contract earlier
1) Variable monthly repayment amount
2) Hard to plan your expenses
3) Risky in case the interest rate goes up in the future
(1) Annuity mortgage (Annuitätendarlehen)
This is the most common type of mortgage in Germany. During the loan period, your monthly mortgage repayment is always a fixed amount. This fixed amount includes both the capital and interest repayments.
In the beginning, your monthly mortgage repayment amount includes a high portion of loan interest. Over time, you have paid off more and more of your loan. The loan interest portion will fall and the capital repayment portion will increase.
You can decide how many percent you want to pay for the capital repayment. The higher the percentage is, the faster the mortgage will be paid off. You should plan at least 2% for the capital repayment. Most banks will not accept a percentage lower than that. Sometimes, you may also be allowed to pay an additional annual repayment (Sondertilgung). This can help you to repay your mortgage faster.
Example – Annuity mortgage in Germany
Loan amount 300,000 €
Interest rate 1.5%
Capital repayment rate 3%
|Interest portion||300,000€ * 1.5% = 4,500€||291,000€ * 1.5% = 4,365€||281,865€ * 1.5% = 4,228€||Decrease over time|
|Capital repayment portion||300,000€ * 3% = 9,000€||13,500€ – 4,365€ = 9,135€||13,500€ – 4,228€ = 9,272€||Increase over time|
|Total yearly payment||4,500€ + 9,000€ = 13,500€||13,500€||13,500€||Stay the same every year|
|Loan balance on 31.12||300,000€ – 9,000€ = 291,000€||291,000€ – 9,135€ = 281,865€||281,865€ – 9,272€ = 272,593€||Slowly paying off|
Advantages of an annuity mortgage in Germany
A good thing about an annuity mortgage is that the monthly mortgage repayment amount is always the same. This is more stable and you can plan your expenses easier. Besides, the repayment amount includes both the interest and capital repayment portion. So, your loan will be slowly paid off over time.
Disadvantages of an annuity mortgage in Germany
Annuity mortgage can be quite inflexible. The repayment period can be very long (e.g. 5 – 30 years). In case the market interest rate falls during your mortgage period, you may not be able to reduce your loan interest rate.
Besides, if your loan is not paid off yet after your loan period, you will have to get a new mortgage to finance the rest of your debt. There is uncertainty about what interest rate you will get at that time. It means that there is a risk you may have to pay a higher interest rate or get a mortgage contract with less favorable conditions.
Moreover, there is usually a penalty payment if you want to pay off your loan before the end of your loan contract. It is because banks want to earn money from your loan interest. If you pay off your loan earlier, your bank will lose the loan interest for the rest of the contract period.
Let’s say if you sell your house and have enough money to pay back the loan before the end of your contract period. You can do so but you will probably need to pay some penalties to your bank.
It is good to know that you have a special termination right to quit your loan contract if the fixed interest rate period in your contract is more than 10 years. Note that the fixed interest rate period only starts once your bank has paid you the total loan amount. This is especially important if you take out a mortgage for a newly built house. In this case, the bank may pay your loan in several installments. 10 years after your bank has paid out 100% of the loan amount, you have the right the quit your loan contract by giving a 6-month notice.
Let’s say you get a 20-year annuity loan in 2023 to build a new house and your bank has paid out 100% of the loan amount in 2024. You can quit your loan contract earliest in 2034 by giving a 6-month notice to the bank. This is very useful because you may find a better contract offered by another bank with a lower interest rate after 10 years.
(2) Full repayment mortgage (Volltilger-Darlehen)
Full repayment mortgage works very similarly to annuity mortgage. The difference is that in an annuity mortgage, you specify the capital repayment percentage for your loan. It can happen that by the end of your mortgage period, your loan is not yet paid off.
If you have a full repayment mortgage, you will specify the time period after which you will pay off your loan completely. Based on this period, the amount of your monthly mortgage repayment will be calculated. It means that the shorter the time period you decide, the higher your monthly mortgage repayment will be.
A full repayment mortgage usually lasts for 10 – 20 years. Normally, the interest rate is fixed during this period. An additional annual repayment (Sondertilgung) option may be possible, depending on the contract.
Example – Full repayment mortgage in Germany
Loan amount 300,000 €
Interest rate 1.5%
|Mortgage period||10 years||20 years|
|Capital repayment rate||9.28%||4.29%|
|Monthly payment||2,693.75 €||1,447.64 €|
For the above loan, you will need to decide the time period after which you will pay off your loan completely. You can see in the example that the shorter the time period, the higher the capital repayment rate.
Advantages of a full repayment mortgage in Germany
With a full repayment mortgage, your monthly payment stays the same throughout the mortgage period. This is great for planning your expenses. Your interest rate stays also the same during the period. So, you don’t have to worry about the potential increase in interest rate.
Besides, unlike an annuity mortgage, your loan will be paid off at the end of the mortgage period. So, you don’t have to worry about getting a new mortgage contract afterward.
Since you can pay off your loan with a full repayment mortgage relatively faster, banks have a lower risk. And you will likely get a better interest rate compared to an annuity mortgage. For example, your interest rate can be 0.15% to 0.35% lower. You can see in the below table how you can save your interest payment with a full repayment mortgage vs an annuity mortgage in Germany.
|Full repayment mortgage||Annuity mortgage||Characteristics of a full repayment mortgage|
|Loan amount||300,000 €||300,000 €|
|Mortgage period||20 years||20 years|
|Interest rate||1.5%||1.8%||Lower rate as the bank has lower risk|
|Capital repayment rate||4.29%||3%||Higher rate to pay off the loan faster|
|Monthly payment||1,448 €||1,200 €||Higher monthly payment to pay off the loan faster|
|Loan balance after 20 years||0||83,529 €||No more debt after 20 years|
|Total interest paid in 20 years||47,433 €||76,285 €||Saving 28,852 € interest payment|
Disadvantages of a full repayment mortgage in Germany
A full repayment mortgage can be quite inflexible because the condition is fixed during the contract period. Even you find a better offer from another bank, you will not be able to change your contract. Besides, an additional annual repayment option may not be possible or may be expensive.
Moreover, a short contract period means a higher repayment amount per month. A higher portion of your household income will be needed to pay off the loan and it means more financial stress. You need to make sure that you will be able to pay the monthly repayment on time for the whole contract period. If you fail to pay on time, the bank will charge you penalties which can be very expensive.
Again, you have the special termination right to quit your contract after 10 years. This right is governed by law and it gives you a chance to restructure your mortgage contract.
(3) Interest-only mortgage (Endfälliges Darlehen)
With an interest-only mortgage in Germany, your monthly payment will only cover the interest portion. And there is no capital repayment portion. So, the monthly interest payment will stay the same throughout the loan period. At the end of the loan period, you will still have the full loan balance to repay. So, you have to make sure that you have other assets or money to cover the outstanding loan amount.
This type of mortgage is normally only possible if you can pay a large sum of down payment. Banks will usually only offer this mortgage in cooperation with other financial products. For example, building society mortgage, investment funds, or annuity insurances. It is because the banks want to make sure that you have the money to pay off the full loan at the end of the contract period.
An interest-only mortgage is usually used by investors to finance their buy-to-let properties in Germany. It is because the interest payment is tax-deductible for investment properties.
Example – Interest-only mortgage
Loan amount 300,000 €
Interest rate 3%
Capital repayment rate 0% (Full capital payment at the end of the contract period)
|First year and every year afterward||Last year||Note|
|Interest portion||300,000€ * 3% = 9,000€||300,000€ * 3% = 9,000€||Interest payment stays the same throughout the loan period|
|Capital repayment portion||0||300,000€||Capital repayment is only done at the end of the contract|
|Total yearly payment||9,000€||309,000€|
|Loan balance on 31.12||300,000€||0|
Advantages of an interest-only mortgage in Germany
Since you will pay interest only on this mortgage, the monthly payment is relatively low compared to other mortgage types. You only need to pay back the full loan amount at the end of the contract. So, you can invest your money in another place where it generates a higher return. The interest expense can be covered through other financial products like building society mortgage or annuity insurances.
If the mortgage is for an investment property, the interest expense is also tax-deductible. You can offset the interest expense with the rental income.
Disadvantages of an interest-only mortgage in Germany
The risk is higher with an interest-only mortgage. You have to pay back the full loan amount at the end of the contract. The interest rate is usually higher compared to an annuity mortgage. It is because the bank has to bear a higher risk.
To get an interest-only mortgage, you will usually need to show the bank other forms of finance like a building society mortgage or annuity insurances. This is so that the bank has the confidence that you will pay back the full loan at the end of the period.
(4) Building society mortgage (Bausparvertrag)
There are two phases in a building society mortgage in Germany.
During this first phase, you will pay monthly into a savings account to save money. This saving period usually lasts for 7 to 10 years. Note that the interest income in this savings account is very low compared to the market rate. Besides, there is a closing fee and also yearly admin expense.
After you have saved up around 30% -50% of your desired finance amount, you can then enter into the mortgage period. The mortgage amount will be your desired finance minus what you have saved up already. It will take again some years until you pay off the mortgage. This is then similar to other types of mortgage. The more you pay back every month, the shorter the mortgage period.
It is possible to combine a building society mortgage with an interest-only loan, so that you can buy your house already and do not have to wait until your saving period is over. As mentioned before, most banks will only offer an interest-only loan in combination with other financial products. This is to ensure that you can pay off the loan at the end of the contract. A building society contract serves as a security for the bank that you are saving up money to pay back the loan in the end.
If you do not get a loan during your saving period, it is good to know that getting a mortgage after the saving period is not the only possibility. If you want, you can also take out your saved money after the saving period. And you can use the money in whatever way you want. It is your own money.
Another possibility is to continue to pay money into the savings account. The more you save, the lower the mortgage amount you will need. And you earn interest during the saving period.
Example – Building society mortgage in Germany
If you want to finance 50,000 EUR for buying a new house, a building society mortgage contract can look like this:
|Monthly saving amount||300€|
|Interest income from savings||0.1%|
|Saving period||7 years (84 months)|
After paying 7 years into the savings account, you would have saved 25,287.31€ including the interest income. So, now you only need a mortgage of 24,712.69€.
|Amount of money saved||300€ * 84 months = 25,200€|
|Total||25,200€ + 87.31€ = 25,287.31€|
|Amount of mortgage needed||50,000€ – 25,287.31€ = 24,712.69€|
Let’s say you then have a mortgage with a 2% interest rate. If you want to repay 300 per month, it will take you another 7.39 years to pay off this loan.
|Interest rate on the loan||2%|
|Mortgage period||7.39 years|
So, you will need around 14 years in total to pay off the 50,000 EUR finance.
Advantages of a building society mortgage in Germany
Secure the current low interest rate
If you are looking to buy a house later and you expect the interest rate to go up in the future, a building society contract in Germany can help you to secure a future mortgage with the current low interest rate.
Flexible use of the saved money
After the saving period, you can decide how you want to use the saved money. So, it is flexible and you do not necessarily need to use this money as a down payment for your house.
Disadvantages of a building society mortgage in Germany
If you are just looking for a way to save money, you should not be using a building society contract in Germany. It is because this saving contract offers a very low interest rate (0.1% – 1%). You can easily invest your money somewhere else to get a much better return.
Besides the low interest rate, there is also a closing fee which is up to 1.6%. And a 10 to 20 EUR yearly admin fee on top. It is very costly and there are other better ways if you just want to save money.
Long contract period
A building society contract is good if you have a plan and need your finance some years later in the future. For example, if you need 50,000 EUR in a few years to renovate your house. But if you need your finance right now, you may need to look for other options. It usually takes years until the saving period is over and the mortgage period starts.
Can only finance a small amount
A building society mortgage in Germany usually only offers a small amount, e.g. 50,000 EUR. If you plan to buy a house in Germany, you will probably need way more finance than that. It means that you will need to combine a building society mortgage with other types of mortgages in Germany to have enough money to finance your house.
Penalties if you take out money earlier
In case you want to take out your saved money before the saving period ends, you may need to pay a fee and a penalty payment.
(5) Variable rate mortgage (Variables Darlehen)
This type of mortgage includes a variable interest rate, instead of a fixed interest rate like in an annuity mortgage or full repayment mortgage. The interest rate is adjusted every three months according to the rate from the European Central bank.
Variable rate mortgages may not be optimal for long-term financing. There is a risk that your monthly payment may rise if the interest rate increases in the future. However, this type of mortgage can be a good option for temporary financing because of the flexibility. With a three-month notice, you can quit your contract and pay off the loan fully. No penalties are needed like in the case of an annuity mortgage.
Cases you may want to use variable rate mortgage in Germany
For example, let’s say you want to move from your old house to a new house. It may take some time to sell your old house and get the money from the sale. In this case, you may need a mortgage to buy the new house already. Since you know that you will get money soon from the sale of your old house, it may not make sense to get an annuity mortgage that lasts for years. A variable rate mortgage can be a good option as you can pay off the loan once you get the money from selling your old house.
A variable rate mortgage is suitable if you know that you will get a big amount of money soon. For example, sale of your old house, heritage, insurance policy payout, etc. You can also combine a variable rate mortgage with an annuity mortgage. For example, a variable rate mortgage for the amount of your heritage, and an annuity mortgage for the rest of the new house value.
Reduce your risk while benefiting from a variable rate
A capped mortgage is an alternative to a variable rate mortgage in Germany. It works similarly that the interest rate is adjusted regularly. However, you can set the maximum interest rate you would pay. In this model, you can reduce your risk in case the interest rate is rising high. You will need to pay a higher interest rate than the normal variable rate mortgage though. This is because your bank has to cover the risk of a rising interest rate.
Advantages of a variable rate mortgage in Germany
A variable rate mortgage is good for temporary financing. It is flexible and no penalty payment in case you want to pay off your loan earlier.
Disadvantages of a variable rate mortgage in Germany
Since the interest rate is adjusted every three months, it can go up or down. It means that your monthly payment can fluctuate and it is harder to plan your expenses. There is also a higher financial risk for you in case the increase rate goes up.
Mortgage subsidies and allowances in Germany
You may be eligible for different mortgage subsidies and allowances in Germany. You can combine them with your regular mortgages to save some costs.
KfW (Kreditanstalt für Wiederaufbau)
KfW loan usually has a better interest rate compared to normal bank loans. You can take advantage of the KfW loan if you buy your own home or make your properties more energy-efficient. There are many different KfW programs.
For example, you can borrow up to 100k Euros with the KfW program 124. Note that this program is only for self-living homes and not for investment properties. Holiday homes and refinance of your existing mortgage are also not qualified. If you need more than 100k Euros loan amount, you will need to finance the rest of your house price with other types of loans. For example, if your house price is 190k Euros, your finance can look like this:
|Down payment||30,000 €|
|KfW loan||100,000 €||0.75%|
|Annuity mortgage||60,000 €||1.5%|
|House price||190,000 €|
If you are looking to buy a self-used property, you may want to take advantage of Wohn-Riester. It is a scheme where the German government is paying aids to your pension program. The reason is that the government wants to encourage people to plan their pension actively. And buying your own property is one of the ways to arrange for your retirement.
How it works
With Wohn-Riester, you can get a loan and you need to pay a monthly repayment amount including both interest expense and capital repayment. The attractive thing about Wohn-Riester is the government bonus you can get which will pay for part of your capital repayment. You can also claim tax on your capital payment for up to 2,100 Euro per year.
However, once you retire, you have to start paying tax on your loan amount. Wohn-Riester is like a pension. But instead of getting paid during your retirement time, you get paid when you are young and this money is paid directly to finance your own house.
So, when you retire, you have the pay the tax back even though you are not getting pension payment from Wohn-Riester during your retirement. You can choose to pay all the tax at once when you retire. This way you can get a 30% discount. Otherwise, you can pay the tax monthly until you are 85 years old at the latest.
|Wohn-Riester loan||30,000 €|
|Tax rate after retirement||24%|
|Paying all the tax at once||30,000 € *24%*70%=5,040 €||30% discount|
|Not paying all the tax at once||30,000 € *24%/20years = 360 € per year (30 € per month)||Pay until 85 years old|
Bonus amount from the government
- 175 Euros yearly per adult
- 185 Euros yearly per kid if he was born before 2008
- 300 Euros yearly per kid if he was born after 2008
So, if you have a partner and 2 small kids, you can get a maximum of 175€ +175€ +300€ +300€ = 950€ a year from the government.
Mortgage for building a new property in Germany
If you buy a finished property, the bank will transfer the mortgage amount to the seller or the property developer. You will need to provide a copy of the purchase contract to the bank. And it will then transfer the money after the purchase transaction is entered into the land charge (Grundschuld) and the payment is due.
However, if you plan to build a new property, it may take quite some time until the property is built. For example, we bought our house a few years ago. After we signed the purchase contract and finalized our mortgage, it still took 1.5 years until our house was finished. And I know that for some other houses, it can even take 2 years or longer to build!
Banks pay the loan amount in installments
Based on the milestone achieved, you can send your invoice to the bank to initiate the loan payment. For example, your bank will transfer x percent of the loan amount to the property developer if certain tasks are finished. It can be the roof, windows, heating system, etc. The percentage to transfer is governed by German law. The bank can pay up to 7 installments during the building process. Once a milestone is achieved, you just need to send the invoice from the property developer to your bank to initiate the payout.
You can also build the house by yourself
It is also possible if you want to organize the construction work by yourself. For example, you may want to do part of the building work by yourself, and hire some workers for certain building tasks. In this case, you can ask the bank to transfer the installments directly to your bank account in Germany. You can then use this money to pay for your workers or buy the building materials by yourself.
The reason why your bank does not transfer 100% of your loan amount in one go is to avoid you using this money for other purposes rather than building your house. The interest rate for a house mortgage is in general lower than other types of loans. Therefore, the bank has to ensure that you are using this low-interest loan only for building your house.
Commitment interest (Bereitstellungszinsen)
As mentioned before, your bank will pay out the loan amount in installments if you are building the house. You may ask: Do we need to pay interest on the loan amount that has not been paid out yet?
There is something called commitment interest. Even though your bank in Germany has not paid out the mortgage amount yet, it needs to reserve the money for you. For keeping this money in the bank, it will charge a commitment interest. It is usually around 3% per year.
But don’t worry. There is an interest-free period for the commitment interest. This period ranges from 2 months to 2 years, depending on your contract. In the case of an investment property, the commitment interest in the first year is also tax-deductible.
|Mortgage for a new construction in Germany||Note|
|Mortgage start date||Jan 2023|
|Interest-free period||6 months||Until Jun 2023|
|Payout time||Sep 2023 for 100,000€||First payout|
|Dec 2023 for 50,000€||Second payout|
|Commitment interest rate||3% per year||0.25% per month|
|Commitment interest amount||150,000€ * 0.25% * 3 = 1,125€||From July to September|
|50,000€ * 0.25% * 3 = 375€||From Oct to December|
|Total = 1,500€|
As you can see, the commitment interest can get quite expensive. You may negotiate for a longer interest-free period. However, the bank may compensate for this by increasing the interest rate of the mortgage. Therefore, you need to consider the below factors:
- How high is the commitment interest?
- How high is the mortgage interest rate?
- How sure are you about the building time? Can there be a delay?
Considering these factors can help you to decide which mortgage contract condition is the best for you.
6 Best tips on getting a mortgage in Germany
1. How much capital do you have?
You should pay at least 10% to 20% as a down payment when buying your property. Even though it may be possible to get a mortgage in Germany without any down payment, you will get a worse interest rate in your contract. Besides the down payment, make sure you have enough money to pay for all the additional costs relating to the purchase. For example, notary, taxes, estate agent’s fee, etc. These costs can be very expensive (7-16.5%) and they cannot be financed by a mortgage in Germany.
2. Reserve some buffer
The great thing about living in your own house is that you don’t have to pay rent anymore. However, you are now responsible for all the repair and maintenance expenses in your house. Don’t forget the running expenses that you still need to pay after having your own house. For example, garbage disposal fees and management expenses (Verwaltungskosten).
Besides, you should leave some buffers for any unexpected costs. In my case, after moving into our new house for a few years, we had quite a few unexpected costs already:
- hiring a company to clean the snow outside in the common area in winter
- installing snow guards on our roof
- installing a descaling plant at the central water supply
The list goes on. We didn’t realize these expenses before but only knew that it was necessary after we moved in. And it cost us thousands to pay for them. Long story short, you should reserve enough buffers for any unexpected expenses.
3. The combination of capital and interest payment
When the interest rate is low, try to pay a high percentage of capital payment if you can. The higher the capital payment, the faster you will pay off the loan. You should also try to fix the low interest rate for a longer time in your contract. By doing so, you can lower your risk in the future.
Besides, the total monthly repayment amount should not be too high and should be able to cover your cost of living in Germany. In general, it should not be more than 35-40% of your salary. If you and your partner are paying the mortgage together, you should consider the possibility that one income stream may be lost for a certain time in the future. This can happen if one person lost his job, or if he is on parental leave.
For us, we made a big excel sheet and listed out our income and expenses for the next 30 years. Of course, this was just an estimate. But it was very helpful to try to understand our repayment capacity. If you know that you will leave Germany in some years, you may want to get a mortgage with a shorter duration. This is so that you don’t have to pay penalties in case you want to sell your house by then. Another possibility is to rent out your property when you leave Germany.
4. Take advantage of the additional annual repayment (Sondertilgung)
Some banks allow you to pay an additional annual repayment. This is an extra capital payment on top of your normal monthly repayment (usually up to 5%). You should include this option in your contract. If you have spare money, you should make the additional annual repayment so that you can pay off your loan faster and lower your interest expense.
However, before making your additional annual repayment, you should also see if there is a better alternative for investment. For example, if your mortgage interest rate is 1% and you can invest in a fund with a 3% return rate, you may want to put your money in the fund instead of paying off your mortgage in Germany.
5. Compare different offers
You will usually receive a new offer from your bank six months before your contract ends. Don’t accept that right away. You should shop around to see if you can get a better deal somewhere else. Check with an independent mortgage adviser for the best option.
6. Know your right
According to German law, you have the right to quit your mortgage contract if the fixed interest rate period in your contract is more than 10 years. So, after 10 years, you should shop around to see if you can get a better condition somewhere else. You may also cancel your contract and pay off your loan completely without paying a penalty.
Besides, it is good to know that up to 5.5 years before your contract ends or the 10-year mark, you can get something called a forward mortgage. What this mortgage does is securing the current low interest rate at your earliest refinance date.
For example, if my current mortgage ends in 3 years, I can now enter into a forward mortgage in Germany which locks in the current low interest rate. Even though I get the forward mortgage contract now, it will only start 3 years later, after my current mortgage ends.
Nobody knows how the interest rate will develop in 3 years. With a forward mortgage, I don’t have to worry that the interest rate will go up when I look for refinancing 3 years later.
Are you eligible to get a mortgage in Germany?
When you apply for a mortgage in Germany, be prepared to answer a lot of questions from the bank. To check if you are “risky” or not, the bank will try to get a lot of information from you. This is to assess if a mortgage application can be approved or not. Below are some factors that the bank will look at:
- Your Age
- Your employment status (no mortgage if you are in probation period!)
- Your income
- The currency of your income (you need to earn in Euro)
- Your residency status (25% down payment needed if you hold a Blue card)
- Your assets and debts
In some cases, you may need to have a life insurance policy to get a mortgage. Anyway, it is highly recommended to have life insurance if your family is financially dependent on you (so that they will not be forced to move out of their own home in case you die). For more details, check here: Best Life insurance Germany – Top 4 Comparison
If you rely on your income to pay your mortgage, check this out as well: Occupational Disability Insurance in Germany – 4 Best Offers
Tips: if you are sending money back home to support your family, your maintenance payments may be tax deductible. Check out this post for more details: Maintenance payments (Unterhaltszahlungen) – How to deduct in your German tax return?
Additional costs when buying a property in Germany
Besides the mortgage costs, there are some other additional costs when you buy a property in Germany.
|Cost||% of Purchase Price||Notes|
Notary’s and Registration fees
|Interpreter’s cost is on top if you need one|
|Estate agent’s fee||
1.5-7%, plus 19% VAT
Depending on how the cost is split between the buyer and seller
Property transfer tax (Grunderwerbssteuer)
|Depending on your region|
So, you should expect to pay around 7-16.5% on top of the purchase price of your property. You will need to pay these costs out of your pocket as the mortgage will not cover them.
If you buy directly from the seller of the property or from a property developer, you can save on the estate agent’s fee.
For more details on each of these costs, check out this post: Buying a House in Germany – As a Foreigner
How much down payment is needed in Germany?
Your residency status plays a role in how much down payment is needed. EU permanent residents can borrow up to 100% of the property value. But banks usually consider non-residents as higher risk. And they will usually only offer a loan covering up to 90% of the property value.
Even though a 100% loan is possible, it will result in a higher mortgage interest rate. Don’t forget that your additional costs relating to the purchase like notary, taxes, and estate agent’s fee cannot be covered by the mortgage. You need to use your own money to pay them.
Besides, the cost of a kitchen can also not be financed by a mortgage. This is a very strange thing in Germany. A kitchen is considered a “movable asset”. This is also why you may need to buy your own kitchen when you rent a flat. And, don’t forget to take it with you when you move out.
What determines your mortgage interest rate?
Below are some factors that may affect your mortgage interest rate in Germany.
Your loan amount
The higher the loan, the more you have to pay back. It means also a higher risk for the bank that you may fail to pay back. This will usually result in a higher interest rate.
This is the ratio of your loan amount to your property value. The lower the ratio, the better the interest rate.
The length of the fixed interest period
Your bank has to bear a higher risk when the fixed interest period is longer. Therefore, the interest rate will also be higher.
A shorter mortgage duration means that you can pay off the loan faster. The bank has then a lower risk and can offer a better interest rate.
The flexibility of your mortgage contract
Banks charge a premium on the interest rate if you want more flexibility. For example, if you want the option of additional annual repayment, or the possibility to amend the capital repayment rate during the mortgage period.
Your credit score (Schufa)
Schufa is the German credit register. You can get a better interest rate if you have a higher credit score. For more details, check this out:What is SCHUFA – How to get SCHUFA in Germany?
Your financial position
Can you repay the loan? How risky are you in the eyes of the bank? How high are your income and expense? How many assets do you have? Do you have a job with a stable income? Do you have other running debts? All these factors will affect your mortgage interest rate.
The older you are, the higher chance that you may die during the mortgage period and cannot repay your loan. It means also a higher interest rate.
Your family status
If you are single with no kids, you are more likely to lose your job than your married colleagues who have kids. This is because it is harder for employers in Germany to fire employees with kids. Therefore, young and single people will be the first ones to be cut. And they will likely receive a higher interest rate from the banks.
What document is required to apply for a mortgage in Germany?
In Germany, each bank has its own requirement when it comes to mortgage applications. But in general, at least the following document will be needed for your application.
- Your last three payslips
- Your up-to-date pension information
- Your last tax assessment
- Proof of sufficient fund to cover your purchase fees
- Your passport and resident permit
And if you are self-employed, you will also need to provide your balance sheet and profit-and-loss statement for the last two years.
Besides, the bank will also need some documents about the property that you want to finance. For example:
- Copy of the purchase contract
- Current extract from the land register (Grundbuch)
- The floor plan of your property
- Photo of your property
- Building permission (Baugenehmigung)
- Building description and approved construction plan (for a new building)
Depending on the bank, you may need to provide some other documents as well. We put all the documents about our house in one big folder so that we can find them easily.
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Please be aware that this article is intended to provide you with a brief overview of getting a mortgage in Germany. The information and tips in this article are based on personal experiences and thorough research.
This blog is not qualified to give you any professional financial advisory service according to German law and we do not accept any form of liability resulting from reading this article. Our blog makes no guarantee as to the accuracy or timeliness of the information in this article. If you need more details and specific advice on your personal situation, we would highly recommend you to consult a mortgage adviser, a tax adviser, or an estate agent.
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