German Mortgages: What you should know!
No matter where in the world you might consider buying property, taking on a mortgage represents one of life’s great opportunities to benefit from owning your own home or investment property but it also represents for most people the largest and longest term debt they will take on.
So getting the right structure and repayment schedule for you is highly advisable.
But what is a mortgage? Well at its simplest it is an amount of money advanced by the lender (e.g. bank, building society...) towards the price of a property, land or building/renovation. The lender will normally have ownership of whatever has been lent on. The mortgage is repaid over an agreed period of time, together with added interest and other costs. Once the loan is repaid the property belongs to you.
Sounds straight forward doesn’t it? But you have to remember that a mortgage is also a legal agreement (a loan). A failure repay of the loan can have consequences such as repossession of the property. This can also affect your ability to borrow money in the future.
We have seen many cases around the world in recent years of properties being repossessed due to in large part ill advised mortgage and repayment structures. In Germany however we have not seen this type of problem, mainly because of the conservative nature of German lenders.
For many expatriates who think about taking a German mortgage this mindset can be a little irritating. Coming from the UK or the US we are not used to what may seem as almost inquisitorial questions on our personal/financial situation.
Why do they do this? Well, any German lender will not only asses the value of the property that is going to be mortgaged but also - and this is just as important - the "value" of the mortgage-taker.
So let us be more specific on what factors have an influence on the evaluation of a mortgage-taker:
There is of course your income situation. Do you have a regular stable income and is this income enough to cover all your outgoing costs including future mortgage rates?
Are you in employment or self-employed? If you are in employment are you still within your probation period or do you maybe have a limited work contract? Both factors can be an obstacle when it comes to lending.
Should you be self-employed most lenders would want to see your German records (e.g. tax-statement, book-balancing...) over the past three years. No less!
Age is also a factor as the closer you are to retirement the greater the risk assessment from the lenders point of view.
Another major point is other debts that may be running. This could be another mortgage as well as the lease on a car or the instalments for a new TV. The more debts - even small ones - you have running the lower your mortgage rating may be.
Last but not least of course all of your positive financial assets will be taken into account and add to a more positive assessment. Assets can include:
• Bank Deposits
• Building Savings Contracts (Bausparverträge)
• Stocks & Funds
• Certain Pensions & Life Insurances
• Income from Investments and other sources
It is quite normal for German lenders to expect you to pay around 20% of the purchase out of your own pocket. This of course does not include closing costs. However, 100% loan to value mortgages are obtainable with the right circumstances.
• Main German Mortgage Types