The mortgage most suited to an expat depends on income, lifestyle and personal circ*mstances. Some German mortgages require you to start repayment immediately, while others allow you to delay full repayment and only pay interest.
How do mortgages work in Germany?
Mortgage lenders in Germany allow you to borrow up to 100% of the property value (although you will have to cover some other costs of buying a house, such as purchase fees, with your own equity). While some German banks will be willing to finance the full amount, loans of around 80% are more common. Non-German citizens are considered riskier investments and consequently, will usually be required to pay a larger deposit upfront, especially if you are not a resident or employed in Germany.
Mortgages typically last 25 to 30 years, with a fixed interest rate for the first few years. You can also choose to have fixed interest for 10, 20 or even 30 years in exchange for a higher overall rate. In comparison with other countries worldwide, the interest rates on German mortgages are relatively low, usually around 1-2% per year.
To prevent anyone from taking out a mortgage they cannot afford, mortgage providers ensure that your monthly mortgage payments will not exceed 35-40% of your salary. More information on calculating your mortgage affordability and the application process can be found on our German mortgage in 10 steps page.
German mortgage types
There are several different types of mortgages in Germany. The following provides a brief introduction to the most common types; a mortgage advisor can help you decide which is the most suitable for your personal situation. To be eligible for all of the below, you need to meet some key criteria.
Annuity mortgage (Annuitätendarlehen)
The most popular form of mortgage in Germany, an annuity mortgage, is a fixed-rate loan over a period of five to 30 years. Your monthly mortgage payment remains the same throughout the life of the mortgage. At first, you pay mostly interest, with a small amount going towards repaying the original loan. Over time, as the loan is gradually paid off, the interest portion decreases and the repayment portion increases.
One peculiarity of the German system is that lenders will typically allow you to set the amount you wish to repay each month (as a proportion of the original loan, between 2 and 10 percent per year - known as “Tilgung”). You may also be permitted to pay lump sums (Sondertilgung) to pay off your mortgage more quickly.
Full repayment mortgage (Volltilgerdarlehen)
The full repayment mortgage is very similar to the annuity mortgage, in that you pay a consistent monthly rate made up of interest and repayments. The only difference is that, instead of determining your monthly repayment rate as a percentage of the total mortgage, you specify a length of time after which you would like to have fully repaid your loan. Your monthly payment is therefore adjusted to allow you to achieve this: the shorter the term you choose, the higher your monthly repayment.
Interest-only mortgage (endfälliges Darlehen)
Not very common among buyers in Germany, this type of mortgage is almost always used for buy-to-let properties. Under the interest-only model, your monthly payments do not repay the loan, covering only the interest. At the end of the mortgage term, the full outstanding amount is due. Expats will usually need a large downpayment to secure an interest-only mortgage.
Building society mortgage (Bausparen)
A building society mortgage is a type of mortgage that is linked to a savings account. These mortgages are typically characterised by long-term, low interest rates. There are two models: either you save in a designated savings account until you become eligible for a mortgage, or you take out the mortgage and submit repayments into a savings account that is later used to pay off the mortgage.
Variable rate mortgages (variables Darlehen)
In contrast to fixed-rate mortgages like annuity and full repayment mortgages, variable rate mortgages, as the name suggests, have variable rates of interest. Every three months, the interest rate is adjusted to reflect that of the European Central Bank.
This kind of mortgage allows borrowers to take advantage of fluctuations in interest rates, which may enable quicker repayment. Variable mortgages are also relatively flexible, permitting the borrower to make larger payments or terminate the mortgage without penalties. These kinds of mortgages are often combined with other, fixed-rate mortgages.
Mortgage Allowances & Subsidies
The German government (Bundesregierung) makes available various loans, allowances and subsidies to help homebuyers. These low-interest offerings can usually be combined with regular mortgages to help reduce your overall costs. Check whether you are eligible and find out how to apply.
As an enthusiast in real estate and financial matters, I've delved deeply into the intricate world of mortgages, particularly in various international markets, including Germany. Let's break down the concepts addressed in the article on German mortgages:
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Loan-to-Value Ratio and Costs: German mortgage lenders allow borrowing up to 100% of the property value, though typically financing around 80%. Additional costs like purchase fees need to be covered by the buyer's equity.
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Deposit Requirements for Non-German Citizens: Non-German citizens might face higher deposit requirements due to perceived higher risk, especially if not residing or employed in Germany.
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Loan Duration and Interest Rates: German mortgages usually span 25-30 years, with initial fixed interest rates. Longer fixed-rate periods (10, 20, or 30 years) come with slightly higher rates. The interest rates in Germany are notably low, often around 1-2% annually.
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Affordability Checks: Mortgage providers ensure monthly payments don't surpass 35-40% of the borrower's salary to prevent overextension.
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Mortgage Types in Germany:
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Annuity Mortgage (Annuitätendarlehen): Popular and fixed-rate over 5-30 years. Monthly payments remain constant, initially tilted towards interest, gradually shifting to loan repayment. Borrowers can choose a repayment amount and might make additional lump sum payments.
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Full Repayment Mortgage (Volltilgerdarlehen): Similar to annuity mortgage but the borrower specifies a repayment period. Shorter terms result in higher monthly payments.
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Interest-only Mortgage (endfälliges Darlehen): Uncommon for homebuyers, more for buy-to-let properties. Monthly payments cover only interest, with the full loan amount due at the term's end. Typically requires a substantial downpayment for expats.
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Building Society Mortgage (Bausparen): Linked to a savings account with low, long-term interest rates. Offers two models: savings first then mortgage or simultaneous savings and mortgage payments.
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Variable Rate Mortgages (variables Darlehen): Interest rates fluctuate according to the European Central Bank's rates, offering flexibility in repayment. Often combined with fixed-rate mortgages.
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Mortgage Allowances & Subsidies: The German government provides low-interest loans, allowances, and subsidies for homebuyers, often combinable with regular mortgages to lower overall costs.
Understanding these aspects is crucial for anyone considering a property purchase or navigating the mortgage landscape in Germany. Factors like personal circ*mstances, financial stability, and long-term plans play pivotal roles in choosing the most suitable mortgage option.
