A beginner's guide to Mortgages in Germany
An important topic for those considering staying in Germany for the long-haul:
Anyone who is looking to permanently settle here will quite possibly want to consider looking into mortgages in Germany to buy their own property. Even though Germany has a strong renting culture and the law is strongly in favour of the tenant, there are many advantages to make you consider purchasing your own flat or house.
Germany has historically not had a “boom and bust” property market and thus can be seen as a relatively low-risk investment.
You will avoid the risk of being priced out of the market in future.
And lastly but most importantly, you will never have to deal with a pedantic or unscrupulous landlord again!
The article is aimed at expats in Germany looking to buy their primary residence, as opposed to foreign investors. Different rules and requirements will apply for non-residents considering buying property in Germany as an investment. We do not cover this angle in this article or in the subsequent series. Google is your friend.
There is a lot of information on the internet about mortgages in Germany, and much of it is written with foreign investors in mind, as opposed to expatriates who are looking to put down some roots in their newly adopted home country.
You need a large deposit – Wrong
One of the most common misconceptions is that you require a considerable deposit to obtain a mortgage in Germany. This is simply not true. Several articles I have read indicate that you need a 30-40% deposit to buy a home. This is absolute rubbish. While it may be true that the most competitive rates and a larger number of mortgages in Germany may be available to you if you have a larger deposit, it is by no means the most important factor which determines the likelihood of you obtaining a home loan.
It's difficult to obtain a mortgage – Wrong
Another common mistruth is that obtaining a mortgage in Germany is more difficult than it is in other European countries. This probably stems from the fact that purchasing a property is something that Germans will probably only do once in their lifetime, if indeed at all. Culturally, it is not the norm here to “move up the property ladder”. Germans tend to buy one property as a family home, often building their own house, and then staying there for life.
Perhaps it is a result of this that mortgage products are not advertised as heavily, and independent mortgage advice is not as abundantly easy to find as it is in other European countries such as Spain and the UK, where buying a property is something that most young people aspire to.
That's also not to say that banks and mortgage lenders will be falling over themselves to lend you money. You will need a permanent job and good credit history to have a realistic chance of being offered a mainstream mortgage product.
For non-German speakers, LoanLink is an independent German mortgage broker comparing more than 400 different lenders. They offer great English advice which is free of charge for the applicant.
But the application process IS more rigorous
The concept of “shopping” for a mortgage and remortgaging every few years, as one may do in countries with a more prevalent property ownership culture, does not really exist here. This, combined with the reduced demand for mortgage products as a result of the home-for-life cultural mentality, means naturally that there is less competition available in the market. Therefore it is highly recommended to shop around to get the best deal and to use a brokerage service to understand exactly what options and types of products are available. If you only ask your Hausbank then you will be fairly limited in your choices.
Mortgages in Germany may be perceived as being more difficult to obtain due to banks and building societies (Bausparkassen) here will want to know more about you before lending you money. The simple rule of thumb that banks will lend you 3.5 times your gross salary, which is a common guideline in the UK, absolutely does not apply in Germany. This can work both for and against you, depending on your financial circumstances, age, property you are buying, city/suburb you want to buy in.
It's all evaluated based on perceived risk.
In Germany it is much more common to lock in a mortgage for a longer term period. The most common type of mortgages on the market tend to have a fixed interest rate for 10 years, although 15 or even 20 years are also readily available on the market. The shortest possible option is normally 5 years.
Obviously the clear advantage of this is stability and being able to budget for a long time into the future. The disadvantage is that if you lock in at an unfavourable time and the interest rate then goes down significantly, then you are not able to get out of your current terms & conditions until it's time for renewal.
Overpaying & Underpaying
Flexibility in mortgage payments can be somewhat limited in Germany. Taking a “payment break” or “payment holiday” is virtually unheard of, although lump-sum equity payments and moving your repayment rate upwards or downwards to extend or reduce the duration of your mortgage, are much more common.
It is a relatively common feature for mortgages to offer you the option to pay up to 5% of the remaining mortgage value in lump sum equity payments once per year.
Changing your repayment plan (Tilgungsplan or Tilgungsrate) is also a common feature of many mortgages, although the amount of times you are permitted to adjust this are usually limited.
A repayment mortgage is the classic type of mortgage offered in Germany, just as it is in most other countries. The subtle difference in Germany is that the mortgage is usually set up based on the % of the loan to be repaid each year, known as the Tilgung in German, as opposed to the number of years the loan should be repaid in.
Whereas in the UK for example, a mortgage is usually configured based upon the theoretical timeframe to repay the loan (with 25 years as the most common mortgage), the German system will prompt you to specify how much of your loan you want to repay each year. Minimum usually is 1%, which, depending on the interest rate applicable, will determine the length of the loan.
Interest Only Mortgages
They are not available if you are seeking to borrow a high loan-to-value i.e. if you have a smaller deposit to put down.
Such mortgages have to be taken out in cooperation with some kind of annuity fund, to reduce the risk of negative equity and insufficient collateral to repay the loan at the point when it matures.
Unless you go to a specialist mortgage broker, it is very unlikely you will be offered such a product by your local bank or through an online mortgage comparison website. Interest-only mortgages are more common for investment properties than for financing a primary residence. Mortgage interest is tax-deductable in Germany for investment properties but is not for owner-occupied homes.
One of the first things you will probably want to do after reading this is to look at to play with the different repayment percentages and interest rates, in order to figure out how much your mortgage should cost. There is an easy way to do this online without scratching your head in Excel or contacting a mortgage broker.
The German online mortgage broker LoanLink has also built an English loan calculator providing tailored information. You can find out how much you can borrow or the amount of required purchase fees (notary costs, real estate tax, real estate agent fees).
There are loads of other mortgage calculators online but I find the one from ImmobilienScout easiest to use, especially for those of you with limited German.
We will explore in a future article more in relation to the actual process of buying a property, as opposed to getting a mortgage! Stay in touch by signing up for our email newsletter.
This article is meant to offer an introduction to the basics and in no way should be considered an alternative to independent financial advice from an industry expert. While the article is factually accurate, buying a property and obtaining a mortgage is a topic worthy of much more time and detail than this blog post. Live Work Germany is not a professional financial advisory service and as such accepts no liability.