Financing real estate in Germany – the five most common mistakes

It doesn’t matter if it’s a house or an apartment – as long as it’s your own. Especially with rising rents, many renters dream of owning their own property. Sustained low interest rates make this dream financially feasible in many cases.

But despite these favorable market conditions, property buyers should make a proper assessment of the situation. This is because there are several issues that should be considered beforehand. While it is tempting to get a low interest rate on a loan, you need to consider whether you will be able to pay it back.

Comparison of financing terms saves money

Even small differences in interest rates have a big impact on real estate loans. For a loan of € 450,000 with a fixed interest rate over 15 years, you can save almost € 70,000 in interest. The magazine “Finanztest” has calculated that with interest rates of 1.5 and 2.66 percent, a higher-interest loan would cost the borrower twice as much as one with more favorable terms.

Financing real estate in Germany – the five most common mistakes

In some regions property prices have been rising steadily for years. Allegedly favorable financing models make expensive properties appear affordable. This makes it all the more important to secure stable financing.

1. Too low an own contribution

What is the own contribution? This is the capital required by the bank from the borrower who wants to get financial support for investment in buying an apartment or building a house. The remaining part of the required amount is provided by the bank – this is the so-called external capital. There are banks that finance the property in 100 percent, but this is usually an expensive solution. The reason is the higher interest rate on the loan. When the share of the loan in the purchase price is 60 percent, the effective interest rate is noticeably lower than when as much as 90 percent of the property purchase price is financed with a loan.

The higher the equity of prospective property owners, the lower the interest rate on a property loan. Buyers should be able to provide at least 30 percent equity.

2. The short duration of the fixed interest rate

Loan rates have been at very low levels for a long time. According to mortgage broker Interhyp, borrowers are currently receiving construction loans with interest rates of just over 1 percent for a 10-year fixed rate term. Even loans with interest rates of less than one percent can be obtained from the institutions offering the most favorable terms, assuming adequate creditworthiness.

Since the European Central Bank (ECB) declared at the beginning of 2019 that it will keep interest rates low, market observers forecast that construction loan rates will continue to be favorable for property buyers. Therefore, at the moment, it is profitable to enter into contracts that provide for a long period of fixed interest rate.

It is true that some banks charge an additional fee for this. However, this could pay off if interest rates rise again in the future. According to data from Stiftung Warentest, the interest rate for a fixed rate loan over a 20-year period is on average 0.7 percent higher than for a 10-year fixed rate period.

3. Low repayment instalment

A low repayment installment – this sounds tempting, but it means a very long time to repay the loan. The monthly installment should be tailored to the borrower’s financial situation. Usually a person of young age is able to pay higher installments than an older person. As a rule, the installment should not exceed 40 percent of net income.

4. Lack of flexibility

On the one hand, fixed installments make repayment terms more transparent. On the other hand, they can cause problems when life circumstances change, such as when the income of one partner who takes care of a child during parental leave decreases. It is good if borrowers can then reduce the installment of the real estate loan. Admittedly, many lending institutions charge an additional fee for the ability to flexibly repay the loan. But it can still be cost-effective.

Buyers of real estate should also pay attention to the possibility of making an additional repayment of part of the loan outside the established schedule. Many banks offer this option free of charge. By making additional repayments of five or even ten percent of the loan amount every year, you can pay off the loan faster.

It is worth noting that financial institutions often themselves do not offer loans for the purchase of real estate with flexible repayment. Buyers of real estate should ask about it themselves and compare offers. In the case of a 15-year loan, two changes of repayment terms should be possible.

5. Financing without state subsidies

Many property buyers forget that they are often entitled to state subsidies. This applies to the purchase of your own home as well as to the construction of energy-efficient houses and measures for the conversion of your property to meet the needs of people with disabilities.

On the website of the KfW (Kreditanstalt für Wiederaufbau) – the German state development bank based in Frankfurt am Main – property buyers or owners can find out about existing support programmes. It is also worth inquiring about these offers at your bank.

To ensure that the dream of owning one’s own property does not turn into a nightmare, property buyers should take the above-mentioned issues into account when choosing a property loan.

It is advisable to ask for offers not only from your bank, but also from credit brokers and other nearby banks. Remember to choose identical criteria for comparison purposes, such as loan amount, repayment period, equal or decreasing installment, etc. Also, borrowers should determine in advance their financial needs and the amount they are able to repay each month for the loan.

An important aspect of financing a property purchase in Germany with a KfW loan was pointed out by one of our readers:

“Loans from kfw can be taken out for up to 10 years. After 10 years you usually have a considerable amount to pay back. In order to avoid this, it is necessary to open a savings account (Sparbuch) in addition to the line of credit, where money is to be deposited for the repayment of the remaining debt from KfW. Although you can count on advantageous financing, you have to bear in mind that interest rates will rise. In addition, this makes the financing more opaque, as we have 2-3 lines of credit (KFW, the main credit, the savings account or at the end another credit to pay off the remaining debt).

Many banks have interest rates that are only slightly higher than KfW’s, so it makes sense to do a simulation with and without KfW 101. With KfW financing you can get up to € 100,000 for the purchase of a property and the low interest rate is tempting, but bear in mind that you get a fixed interest rate for a period of 10 years.

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