Main German Mortgage Types
• Fixed Interest Loans (Capital & Interest Repayment)
• Interest Only Loans (Zinszahlungsdarlehen)
• Building Society Loan (Bausparvertrag)
• Variable Rate Loans (Flexibles Darlehen)
• Riester Pension Programme (Riester Rente)
• KfW Bank Home Ownership Programme
Fixed Interest Loans (Capital & Interest Repayment)
This is perhaps one of the most common types of property loan in Germany. With this type of loan the instalments are the same amount throughout the repayment period. To begin with the interest portion of the instalment is high and the repayment portion of the instalment is low. As the loan is repaid the interest portion decreases and the loan repayment portion increases.
The client can decide on the percentage for the annuity (in general no less than 1% - normally referred to as "Tilgung") as well as the runtime of the loan. Clients can also decide whether they wish to make additional down payments of the loan (no more than 10% p.a. - normally referred to as "Sondertilgung"). Should the loan not be repaid by the end of the fixed runtime there will be the need for re-financing. Re-financing and securing interest rates at a current level (“Forward Darlehen”) can be arranged maximum 5 years prior to the end of an existing mortgage.
Interest Only Loans (Zinszahlungsdarlehen)
With this type of loan only the interest portion of the loan is repaid over a fixed term. This can make the repayments seem quite low. But of course the full amount of the outstanding capital of the loan is still due for repayment at the end of the term. Still this type of loan can be very interesting for investment buyers should they be German tax payers as the interest payments can be tax deductable.
Should this type of loan be taken for long term mortgage funding then it is highly recommendable to make sure that other savings or assets can cover the outstanding loan at the end of the term.
Building Society Loan (Bausparvertrag)
Often you will find that an annuity loan is linked to a building society savings programme (Bausparvertrag). The instalments to be made are in part (or in total) paid into the savings programme which will be used at a later stage to pay off the mortgage.
This type of loan is still popular in Germany and is promoted strongly by banks and building societies. We would however sound a note of caution with this type of loan as they tend to have quite a number of fees connected.
Variable Rate Loans (Flexibles Darlehen)
In this case the interest rate tracks the appropriate base rate, in Germany the Euribor (Euro Interbank Offered Rate), and is adjusted accordingly every three months. Once the Euribor-rate increases, the interest which has to be paid increases as well as vice versa. When someone decides to opt in for a mortgage based upon an adjustable interest rate (also known as a floating rate or variable rate mortgage), they are informed beforehand that they will pay the Euribor-rate plus an adjustment, for example Euribor +1%.
This type of loan in Germany has a number of options. A partial or full repayment of the loan can be made in general every three months. Also in many cases the loan can be turned into a fixed interest and repayment loan if necessary.
A variable rate loan can be a useful option for mortgage provisioning providing of course that Euribor is at a low rate. A close eye has to be kept on the development on the Euribor-rate at all times.
Riester Pension Programme (Riester Rente)
The "Riester-Programme" is a state-run aid for private and company pension schemes. The German "Altersvermögensgesetz" (Retirement Savings Act) defines all the details and conditions. With this state supported programme the individual shall be motivated to care about his/her pension actively. The state shows support by paying certain amounts and/or guaranteeing tax incentives.
The "Wohn-Riester" can be a part of this and is a contract of loan to buy or build privately used real estate and cooperative shares.
In General everyone who is compulsory covered by the German statutory pension insurance can claim for such a programme. Also each marriage partner who does not have the right to receive aid his- or herself but whose marriage partner complies with the requirements. Additionally, the partners have to be fiscally connected.
KfW Bank (Kreditanstalt für Wiederaufbau)
KfW bank offers different loan concessions for those who want to buy or build a home for themselves to live in (KfW Home Ownership Programme) as well as for everyone who is investing to make an older residential building more energy-efficient. Other loan packages can be arranged to purchase a newly refurbished home or for building/purchasing an energy-efficient home (KfW Energy-efficient Construction & Refurbishment).
What promotional funds are available?
Depending on the programme between EUR 50,000 to EUR 100,000 can be financed with the individual KfW programmes. Funds from different programmes may also be combined.
Why have a KfW loan?
In many instances KfW bank can provide a lower rate of interest and can have the overall benefit of lowering your mortgage costs.