Nothing lasts forever - German Mortgage Rates set to rise!
“It’s an ill wind that doesn’t blow someone some good.” This truism has certainly been born out in the form of German mortgage rates.
Since the financial collapse of 2008 German mortgage rates have over halved!
In 2008 a 10 year fixed mortgage would have been close to 5 % per annum. But a 10 year fixed mortgage rate could have been as low as 1 % per annum in May 2015.
Another truism is “nothing lasts forever” and this is being seen in German mortgage rates which are rising now. In our opinion rates will rise further in the coming weeks and months as monetary policy seeks to correct itself.
Since May this year we have seen the same 10 year fixed loan rise by nearly 1 % per annum extra.
It should be said however that German mortgage rates still remain very low and can still be had for as little as 1.5 % per annum (10 year fixed). But the glory days of ultra low mortgage rates appear to be fading.
For those thinking of entering the German property market or wishing to remortgage we can only leave you with another truism: “Time is of the essence!”
You may have stumbled lately over an amusing little bulletin: Ben Bernanke, former Head of the Federal Reserve, had applied for a mortgage to refinance his Washington home but was rejected by his bank.
Now how could this happen?
Mr. Bernanke made some crucial mistakes which could have been avoided had he consulted before with his bank or mortgage adviser:
We have no doubt that Mr. Bernanke did find a way to convince his bank to grant him the loan. For the rest of us however we would strongly suggest that you take such facts into consideration should you plan to apply for a mortgage and consult with a professional mortgage adviser. After all: timing can be of the essence!
Money has never been closer to being given away for free than in Germany today.
People who are buying German property now are being handsomely rewarded with incredibly low long term mortgage rates.
Money may never have been cheaper to borrow than it is today. Current mortgage rates are at their lowest in over 40 years. This is certainly a generational low and perhaps a once in a lifetime opportunity for those who can obtain property financing.
5 Year Fixed 1.16%*
10 Year Fixed 1.63%*
20 Year Fixed 2.27%*
Of course many International workers in Germany may consider that renting is the best way to go and this is the case if your tenure in Germany is short. But according to Immobilienscout24 rents have increased since August 2013 on average.
Will this continue?
Perhaps not, but a surge in rent increases is in large part due to the upward momentum of property prices in Germany which looks set to continue in key states and cities as prime building land and existing homes falls far short of demand.
According to the Federal Institute for Research on Building, Urban Affairs & Spatial Development (BBSR) between 2008 and 2012 only the following number of new apartments were built per 10,000 citizens per year:
These figures are shockingly low but not uncommon in many German cities as strict building regulations and a lack of available space to build is leading to a dearth of new projects in many areas. This in its turn is leading property prices higher. Ultra-low mortgage rates are just the fuel for the fire.
Again according to Immobilienscout24 since August 2013 existing property prices for apartments have surged in
Buying property may not be for everyone and choosing the right area and style of property can be very emotive and sometimes downright frustrating but if you have dreamed of owning your own home or investing for your future then there has never been a better time than now. After all Mario Draghi, President of the ECB, has made it clear that he sees that the ECB is finished cutting rates and it’s now up to countries (such as France) to implement structural reforms to dig themselves out of the hole.
All of this is leading people into the false expectation that ultra-low mortgage rates are here to stay. Alas they are not! Only five years ago mortgage rates in average were 200% higher than they are today. Let us repeat that we believe that today’s mortgage rates represent a generational opportunity for those buying their own home or investing for their future.
*Example based on clients having a 40% deposit and all closing costs.
Simply put: Property can be one of the best investments you can make and at a time of ultra-low mortgage rates and stock market uncertainty this has never been more so. If you are considering to invest in German property our guide can help with essential first steps.
Know why you want to buy
To make money! Right? Well maybe - but for most people buying property is for a long term hold. The chances are that you will rent out the property before selling for profit. So knowing what kind of landlord you want to be is a good first step. If for instance you want to rent out short term furnished property to corporate clients then buying in Schwerin or Dessau may not be your best choice. Frankfurt, Munich or Dusseldorf would be better for this type of market.
Knowing what you want as a landlord will help you target tenants and choose the right areas to maximise your potential gains.
Research your Market
Before you even start looking for property, research your desired areas first. It stands to reason that an expanding population and infrastructure build-up will be good for most property investors.
Consider if the local transport links, shops, schools and cultural amenities are what your type of renter is looking for and can the area continue to attract more people to live there.
It is always worth checking with local estate/rental agents as well as online web portals such as Immobilienscout24.de or immowelt.de etc., to help gage if an area is right for you. Local banks and builders can also be a good source of information.
Location, Location, Location
Success in property investing is very dependent on where you buy. Not only is it about the right country, city, resort area or the right community, it even comes down to buying in the right street. For example if you wanted to buy a short term furnished rental in Munich you would want to make sure you are no further than a two block walk from an underground station. If you want to buy in one of the best areas Munich gets reduced to just a handful of streets.
Success in property investing is not a matter of luck but about careful research. Buying the best location for your investing needs will pay dividends.
Check your Finances
Closing costs can be high on German property:
Notary fees (Notar) = 2%
Property Purchase Tax (Grunderwerbsteuer) = 3.5-6.5% dependent on area
Estate Agent fees (Makler) = 3 to 6% plus VAT dependent on area
and are in general paid by the purchaser.
Most German lenders like to see that you can cover these costs yourself. However 100%plus mortgages are available for domestic purchasers but having these upfront costs tucked away can significantly reduce interest on your mortgage.
If you are buying for a rent yield check out the local property prices against typical rents to help calculate your profit. Always make sure you can carry all the cost should you find the property is empty at any time.
If you are buying an older property consider maintenance and renovation costs such as windows, electrics, pluming etc. that may come up soon. Should you buy a property that is dependent on communal reserves to finance maintenance costs it is very important to check out what savings (Ruecklagen) are shown in the balance sheet (Jahresabrechnung) against upcoming or projected costs.
Get the best Mortgage Deal
It is wise to check out financing options as broadly as possible. Never just settle for what your own bank may offer.
Think about how long you need your financing to run and discuss this with an independent mortgage advisor.
100%plus mortgages are available to German based investors and up to 80% to non-domestic. In most cases there should be no set up or handling fees.
Remember it costs nothing to check out the market and with rates so low it is well worth doing the research.
When Opportunity knocks - open the Door
With interest rates very close to negative for depositors in Germany you will not be the only investor looking for the perfect property.
In cities like Munich, Frankfurt, Dusseldorf etc. demand for good central property is so strong that sellers often ask for sealed bids.
Do your research first including speaking with an independent mortgage advisor and local estate/rental agents. If it makes sense then try to secure the property with a reservation agreement and deposit.
Any property investor no matter where in the world should always seek appropriate qualified tax advice before buying.
Germany offers interesting tax incentives for investors buying residential property to let.
Most input costs can be written down in either the year created or over a number of years against rental income. This can include the interest on a loan attached to the property as well as notary-, estate agent- or management-fees.
There is also a large incentive in the form of a depreciation write down of 2% pa over 50 years on the purchase price of the physical property (not land) for properties built after 31st December 1924. Buildings built before this date are depreciated at 2.5% pa over 40 years.
Any profit from the sale of a residential investment unit is tax free provided the property has been held for at least ten years.
*Please Note: FIRST Financial Direct Group OHG are not tax advisors and the above passage should not be taken as construing any form of tax advice. All Investors should seek qualified and appropriate tax advice before investing.
Consider the Negatives
Buying property may not be for everyone. Consider if you can tie up your money long term and what can happen if prices fall or renters are hard to find. You could find yourself having to sue for eviction.
Is your German language up to dealing with German bureaucracy?
Many but not all problems can be handled in advance by careful planning. Always do your homework first. Speak with professionals in the market and remember that using a reputable and recommended property agent can really help.
How “hands on” will you be?
Some property investors handle the day to day running of their units themselves but many defer this to an agent.
Should you handle matters yourself remember to increase the rent every time you legally can. You can seriously limit the upside resale price of your property by not doing so, especially if you have a renter who does not wish to move at the time of sale.
If like many people you use a property agent make sure that you shop around. What services will you get for what fee? Make sure you get real referrals and that you can get out of a contract easily. Remember that having a good property agent can be a big plus.
German Property Market Perspective
After decades of dormancy property prices of German key locations are now on the rise. This is in large part due to very low mortgage rates and an overall disappointment with deposit rates. Germany is attracting a large amount of foreign and domestic investors looking for good quality, high yielding property.
How long Germany will remain in this mode is hard to predict. Many cities are experiencing a sharp increase in population but lack the space for expansion of residential property which is leading to rise of rental and property prices. Always good for those willing to buy and hold in key locations!