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Buying A Property in Germany: Mortgages Explained

Any expatriate looking to purchase a property in Germany will be glad to know that there are no restrictions on property ownership. However, there is a need for you to take time to learn as much as you can about how to get a mortgage in Germany before you get started.
There are many leading mortgage brokers in the country, which specializes in arranging loans for expats interested in purchasing German properties. Whilst not only being able to guide you through the process of getting the right mortgage for your needs, the broker can also advise you on all the questions you may have in regards to your application. Most mortgage companies have streamlined the somewhat tedious application process, which is normally associated with getting a German mortgage, so that most of the application process, documents, Identity check, etc, can all be done online and via your secure account.

When Is the Right Time to Purchase Property in Germany?

Since time immemorial, the local economic policies have routinely favoured leasing flats and houses as opposed to owning. The reason behind this being property prices have continued to rise at a steady pace over the past few years. According to some real estate experts, the prices may have risen unsustainably, making the market unfavourable for those looking to buy.

At the end of last year (2018), the national Government took it upon itself to host a housing summit, occasioned by protests due to the rising property prices. Many residents, expats, and industry insiders were unhappy with the fact that it was no longer possible to acquire properties in many German towns.

While the costs associated with leasing and buying properties have been on the rise; mortgage rates have continued to hit new lows with each passing year. The new record rates have been occasioned by the influence associated with a negative Euribor rate. The people who have benefitted the most from this negative influence are those who are interested in re-mortgaging their houses and those looking to buy. The latter has gone on to enjoy cheaper deals in the homes they had an interest in acquiring.

Acquiring Property as an Expatriate Residing in Germany

Local real estate investors are the primary buyers of local homes. But this is not to mean that there lacks room for expats and other foreign buyers—especially those that have an interest in leasing out the houses for a certain period each year.

As of now, many are looking to see what kind of impact Brexit will have on the continued decline of the pound. The departure of the United Kingdom has also led to uncertainty as to the impact it may have on UK residents who may have an interest in purchasing German homes.

A mortgage in Germany—How Much Can an Expat Borrow?

To-date, Germany has not placed any restrictions on foreigners interested in buying German properties. This is regardless of whether their initial country of residence is within the EU (European Union) or not.

You should, however, note that the maximum amount of money you can borrow is determined on the status of your residency. If you are a German resident, you are eligible to borrow up to eighty percent of the property’s assessed value. Non-residents are only eligible to borrow between fifty and sixty percent of the homes’ assessed value.

Any person looking to borrow funds to finance a home purchase will also need to have an annual income of at least £20,000. It is also important to note that the amount of money you pay as monthly mortgage repayments can never exceed thirty-five percent of your total monthly salary.

Online German Mortgage Calculators

Online mortgage calculators make it easy for expats looking to buy properties in Germany to determine the total amount that they can borrow. The calculator will also help you to estimate the amount of money you will need to pay as the monthly rate.

How Much Does It Cost to Get a Mortgage in Germany?

German mortgages are among the lowest rated across the globe. The low rates have been brought about by the low Euribor rates experienced in the last couple of years. According to information obtained from Statista, the rate averaged at 1.85% in the last twelve months.

When applying for a mortgage, the fee charged typically lies between 1-2 percent of your overall loan amount. Buyers are required to part with a property assessment fee for all properties valued at more than £500,000. The property assessment fee generally costs between three hundred and six hundred pounds.

Once you have signed the deed for your new property, you will need to pay numerous fees. They include:

  • The registration fees as well as the notary fees. Combined, the two are at around 1.5% percent of the property’s valuation amount.
  • A fee for the real estate agent who represented the buyer on this transaction. The fees can range anywhere between 3-6% of the total closing price. Note that property buyers in Germany are responsible for paying the real estate agent fees. In some cases, they can negotiate with the seller so that both parties end up covering the fees.
  • After this, the buyer will have a period of one month or four weeks to make sure that they have completed paying the real estate transfer tax. The tax for transferring real estate technically ranges between 3.5% and 6.5% of the homes’ value. The rate to pay is dependent on the state where the buyer has acquired the property.

Tax Deductions Levied on Property Mortgages

The rates charged on German mortgages for properties occupied by their actual owners cannot be counted as tax-deductible.
On the other hand, if you choose to lease out the German home, you can offset any expenses that you incur in the process of generating the rental income. Some of the expenses that you can deduct from your tax bill include:

  • Home improvements
  • Repairs
  • Mortgage charges

There is, however, a catch to this exception—the expenses should not exceed more than 15 percent of your home’s true worth. All major home improvements will be taxed differently from minor expenses.

The standard progressive rate applied in 2019 for income tax is the same rate that is also applied on rental interest. Based on the prevailing figures, it means that the initial £9,169 is not taxed by the authorities. For married couples, the tax-free amount is the first £18,338.

If your earnings are above the stated amounts, the rates begin at 14 percent and go all the way to 42 percent. The latter is, however, for earnings of up to £55,961. Once the calculations for the rental income are complete, a solidarity surcharge of 5.5 percent gets placed on tax already imposed.

Any expat who chooses to hold their property for a period of less than ten years will have to pay a capital gains tax. The implication here is that if you own a property for 9 years, and earn £60,000 as a sole owner, you will need to pay tax at a 42 percent rate.
But if you choose to hold on to the property for more than ten years, any capital gains from the property will not be considered taxable income.

German Mortgage Requirements

The process of applying for a mortgage is quite straight forward. But it is worth pointing out that the scrutiny placed on the buyer’s financial records and other accompanying documents can tend to be unnerving.

Some of the documents that you are required to furnish for this application include:

  • German self-disclosure questionnaire
  • An extract obtained from the register of lands for a period covering six weeks
  • Property assessment
  • Proof that you have readily available equity
  • Proof of employment—for this you need payslips covering between two and twelve months
  • Documentation showcasing rental income—this applies to properties that have been leased out in the past.
  • Your current tax returns
  • If you are self-employed, you should furnish proof that you have additional sources of income. You will also need to provide balance sheets covering a period of two years, an economic and business evaluation for the business, and the tax returns you filed in the past year.

Foreign buyers are required to provide copies of their travel documents, i.e., passport. In some instances, one may also need to make available a copy of their residency permit.

How Do You Go About Applying for a German Mortgage?

The process followed in applying for a mortgage here is the same as the one followed in other countries. The only difference is that German banks place additional scrutiny on the applicant’s financial status. You will need to obtain a credit report as part of the due diligence process.

Foreigners may not have this document, which means that they will need to bring with them a creditworthiness report from a reporting agency in their home country.

Local banks tend to be welcoming to expats looking to acquire property in Germany.

What Kind of Mortgages Are Available?

A fixed-interest loan is one of the most popular German mortgages. Borrowers get to set the terms to be used on the principal repayment rate (typically lies between one and ten percent above the term placed on the initial loan). They can also make a decision on whether to only continue making principle only payments (this applies for up to ten percent of the remaining amount).

When the term comes to an end, any arrears will need to be cleared completely or through additional financing.

Interest-only Loans

Highly favoured by people looking to purchase rental properties. For the duration of the loan, the buyer will only need to pay the interest. The principle gets paid at the end of the loan’s term.

Building Society Loans

These are a blend of interest-only and fixed-interest loans. For the course of its term, the buyer is able to make payments to an annuity together with the loan interest. The annuity is used to pay the principal amount when the loan reaches its term.

Variable Rate Loans

It is a type of loan that gets adjusted after every three months, and which is directly connected to the Euribor rate. Buyers can make additional payments on the principle as the rates get adjusted.

Guarantees on German Mortgages

The lack of a guarantee on the mortgage is one of the peculiarities that are associated with the mortgage industry here. It is a factor that tends to make it very difficult for one to get a mortgage in this country, especially when certain situations are taken into account.
Such situations include:

  • If the bank is unable to verify that your past and current incomes are above its acceptable threshold
  • The buyers’ credit is found to be subprime
  • If a buyer does not have enough cash to cover closing costs and the property’s down payment
  • If you are remaining with less than five years before you retire

Additional German Mortgage Peculiarities

Any person who currently lives in Germany and is paying taxes can receive a subsidy from the government. Notable subsidy programs include the KFW (in German) and the Riester Pension Program. The program provides subsidies that can be used to pay mortgage costs, while the KFW program provides loans for people looking to buy homes in the country. You can use the KFW program in conjunction with the mortgage in Germany to acquire real estate.

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