Getting a mortgage in Germany
If you're looking to buy German property, learn about the quirks of German mortgage and quirks for foreigners before buying your dream property abroad.
If you're drawn to property for sale in Germany, you'll find no restrictions on foreigners buying German property or getting a German mortgage, although the maximum amount you can borrow is increased if you are an official resident in Germany. With stable German property and mortgage markets combined with historically low interest rates, buying German property has emerged as a booming market as Europe emerges out of a financial crisis.
Is now a good time to buy property in Germany?
Since the rebuilding of Germany after World War II, political and economic policies have strongly favoured renting over buying German property. The result has been profoundly flat home prices over much of the last 40 years. However, with the current fall in mortgage rates – particularly influenced by a negative Euribor – and a healthy influx of political refugees, German home prices have been appreciating at roughly 5.6 percent for the last five years, particularly in urban areas. The primary buyers of German homes are local real estate investors – but there is plenty of room for foreign buyers, especially if the buyer intends to lease the property out for at least part of the year. Read about how to buy a property in Germany and where to live in Germany.
In addition, the German officials do not anticipate that Brexit will have any overall effect on the economy or the ability of foreigners to purchase real estate. However, the particular details of what this means for UK expats will not be determined until the conclusion of the exit negotiations, estimated to take at least two years once the UK triggers Article 50 to officially begin the withdraw process. However the decline of the pound against the euro and German bankers’ proclivity for being conservative may create additional challenges for some UK residents trying to obtain a German mortgage.
How much can you borrow in Germany?
There are no restrictions on foreigners purchasing German real estate, regardless of whether or not their country of origin is a part of the European Union (EU).
The maximum amount you can borrow, however, is dependent on your residency status. Residents of Germany can borrow up to 80 percent of the assessed value of the property whereas non-residents are limited to approximately 55–60 percent of the assessed value.
Borrowers must also have an annual income in excess of EUR 20,000. Under no circumstances can your monthly mortgage payments exceed 35 percent of your monthly income.
Cost of getting a German mortgage
Combing the low default rate on German mortgages with historically low Euribor rates has led German mortgage rates to be among the lowest in the world, with current average mortgage interest rates at some 1.90 percent per year. Bank origination fees are typically 1–2 percent of the total loan amount. If the property is valued at more than EUR 500,000 then the buyer must pay for a property assessment, which typically costs around EUR 300–600.
Upon signing the deed, fees will be due:
- the notary’s fees and registrations fees at around 1.5 percent of the assessed property value,
- the real estate agent’s fees ranging 3.5–7.5 percent of the sale price.
Thereafter the buyer will have up to four weeks to pay the real estate transfer tax, which ranges from 3.5–6.5 percent of the value of the property, depending on the state where you are buying.
Tax deductions for German mortgages
The interest on German mortgage for owner-occupied properties is not tax-deductible. However, if you rent your property in Germany or opt for a buy-to-let investment, any expense incurred for generating your rental income can be offset against your taxable rental income, including mortgage expense, maintenance, repairs and improvements. The only caveat with improvements is that if the expense is greater than 15 percent of the property value, the expense must be added to the depreciation allowable. The standard depreciation for rental properties is 2 percent over 50 years, or 3 percent for the first eight years if the house is newly built. Rental interest is taxed at the standard progressive income tax rates, as seen below.
German income tax rates 2016
|EUR 8,652–53,665||EUR 17,305–107,330||14 percent|
|EUR 53,666–254,446||EUR 107–508,892||42 percent|
|EUR 254,447+||EUR 508,893+||45 percent|
After rental income tax is calculated, a 5.5 percent solidarity surcharge is placed on the levied tax. For example, if your rental income is EUR 50,000 you will have a nominal tax of 14 percent on EUR 41,383 as an individual or on EUR 32,695 as a married couple (or EUR 5,789 and EUR 4,577 respectively). On these figures the solidarity surcharge is added for a total income tax of EUR 6,107 and EUR 4,829 respectively.
In addition, foreign property owners will be subject to capital gains tax if the property is held less than 10 years. The capital gains are added to the tax payer’s annual income in the year the property is sold. Hence, if you sell your property after nine years and show a gain of EUR 60,000 as an individual, that amount will be subject to a 42 percent tax rate. However, if you hold your property for 10 or more years, any capital gains is not counted as taxable income.
On non-rental property, capital gains over EUR 801 is taxed at approximately 28 percent plus the solidarity surcharge. However, capital gains is only taxed if a property is sold within 10 years.
Requirements for a German mortgage
The mortgage application in Germany is straight forward, but the level of scrutiny of the applicant’s financial and other records can be daunting.
The documents you will need to provide – translated in to German – include:
- German self-disclosure (Selbstauskunft) questioner;
- property assessment;
- proof of employment (2–12 months of pay slips);
- self-employed individuals must provide additional proofs of income and net worth including two years of balance sheets, business and economic evaluation, and prior year’s tax returns;
- latest tax returns;
- documentation of rental income (if the property has been previously leased out);
- proof of available equity
- extract from the Land Register for the previous six weeks.
In addition, foreign buyers will need to provide copies of their passport and, in some cases, a residency permit.
How to apply for a German mortgage
The process of applying for a German mortgage is similar to elsewhere, with the notable difference being the substantial level of due diligence how the bank will review your financial status. Part of that due diligence process will require obtaining a Schufa report, which is the equivalent of obtaining a credit report. As a foreigner you may not have a Schufa record, in which case you may need to show proof of your credit worthiness from your home credit reporting agency.
The banks listed below are welcoming to foreign real estate buyers and in some cases may be able to offer translation services, although there are many German banks to choose from, including some which specialise in offering expat mortgages.
Some of the main German banks include:
- Commerzbank – a leading commercial international bank with core market in Germany.
- Deutsch Bank – one of the largest and most respected banks in Germany.
- Postbank – one of Germany’s largest banks specialising in private customers.
- Sparda-Bank – a large retail bank which is part of the Cooperative Bank system.
Types of German mortgages
A common German mortgage is the fixed-interest loan. An interesting aspect of the German mortgage system is that it allows the borrower to set the terms for the rate of principle repayment (typically between 1 percent and 10 percent of the principle amount over the term of the loan), and whether to make additional principle-only payments (up to 10 percent of the outstanding amount). At the end of the loan term any outstanding principle must be paid in full either with cash or further financing.
Interest-only mortgages are offered in Germany and favoured by investors seeking rental or buy-to-let properties. During the term of the loan, only the interest portion is paid; the principle is due in full at the completion of the loan term. In Germany, it is possible for German residents to deduct the interest payments from their annual income taxes.
Building Society loans
Building Society mortgages are a hybrid of fixed-interest and interest-only loans. During course of the loan term, in addition to paying the loan interest, the borrower pays into an annuity which goes towards paying the principle balance when the loan term is reached.
Variable rate loans
Variable rate loans are keyed to the Euribor and adjusted every three months. Additional principle payments can be made quarterly as the loan’s rate is adjusted. If the borrower believes the Euribor rate plus the bank’s margin is going to rise above a certain amount, in Germany the variable rate loan can be converted into a fixed-rate loan.
German mortgage guarantees
One peculiarity of the German mortgage industry is the lack of mortgage guarantees. This makes it incredibly difficult to get a mortgage in Germany in certain situations, for example:
- if your credit is subprime;
- if you have less than five years until retirement;
- if you do not have the available cash to cover the down payment and closing costs;
- if your current and past income cannot be verified as being above the bank’s threshold.
Instead individuals may, if they or their bank desires it, purchase private mortgage default insurance from their bank or a private insurance company.
Other peculiarities of German mortgages
The German government offers special subsidiaries for individuals living in and paying taxes in Germany. Two of the most important are the Riester Pension Program (available to anyone who is legally covered by the German statutory pension program) and the Kreditanstalt für Wiederaufbau Bank Home Owership Program (KfW).
The pension program may provide individuals certain pension subsidies in the form of paying for some of the mortgage costs or providing tax incentives for purchasing used real estate.
The KfW program can fund up to 30 percent of the real estate acquisition costs to a maximum of EUR 100,000 for those who wish to occupy a bank-purchased German home. The program can be used in conjunction with a mortgage bank’s products and often comes with a lower rate of interest than the bank’s mortgage.
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