German Mortgage Rates for Foreign Investors

Germany is experiencing unprecedented real estate growth. The median asking price for apartment buildings rose more than 17 % from €1,149 to €1,349 for m2. There have been stable price increases across property type boundaries including low quality apartment buildings to luxury markets. This is attracting the attention of investors – both from within Germany and those from surrounding countries. Locating a suitable investment property is only one step in the property acquisition equation, as most purchases involve some degree of bank financing. Understanding the different types of German mortgage packages and current interest rates can help investors choose their best option.

Classes of German Mortgages
There are about as many different types of mortgage options as there are investors. Here is an overview of the main categories:

Fixed Interest
This is the most common type of mortgage. The borrower pays a fixed payment on the interest and principle over the amortization period of the loan. At the beginning of the loan, the portion paid on the interest is much higher than the principle.

Interest Only (Zinszahlungsdarlehen)
Payments are made on only the accruing interest. None of the payment goes to repay the loan balance. Though this keeps the payments low, the balance owed increases as interest is added but the principle is not paid. This should only be considered as a short term or interim loan.

Variable Rate (Flexibles Darlehen) Loan
This work off a variable rate are adjusted every three months based on the activity of the Euribor (Euro Interbank Offered Rate). Based on the how the interest rate changes, the payments will increase or decrease every three months.

Building Society Loan (Bausparvertrag)
This is a very popular type of loan that is linked to a building society savings programme. The payments (all or part) are made to the savings programme and in time, these savings are used to pay off the loan.

Bank Home Ownership Programme – KfW (Kreditanstalt für Wiederaufbau)
This program is geared toward homeowners and can be written for existing purchases or new construction. This package offers incentive programs and very competitive interest rates.

Loan Terms
Germany offers very attractive loan terms. German mortgage rates are the lowest in the European Union with rates between 1 – 10%. The average lending rate reported by the Deutsche Bundesbank is 1.5%. The average rate for non-residents is between 2.39 and 4.6%.

German mortgages will finance up to 54% of the value of a personal apartment purchase and up to 70% on investment apartment buildings to non-residents and up to 80% for residents. Typically the length of a loan is between 10 to 20 years. Loans will only amortize until the retirement age of 75, which can cause a hardship for older investors. One primary difference with obtaining a loan in Germany versus in the UK or USA is that mortgage underwriters tend to be very conservative. They will analyze not only the value of the property and/or income stream but also the credit worthiness of the borrower – and in extreme detail at that. This means that borrowers must be prepared with personal financial data.

Some of the documentation you will need to provide will include pay slips for the last 3 months (or several years of audits financial statements for the self-employed), up to 6 months of bank statements, P60’s for 2 years and a copy of your passport. All debt payments including other loans and credit cards must not exceed 30% of your gross income. Financing your property purchase using a German mortgage can be well worth the time and effort. Even though many investors find the German mortgage market conservative and antiquated; their extremely low mortgage interest rates can greatly increase the yield on investment properties.

Sources:
http://www.buyberlin.co.uk/german-mortgages.php
http://www.toytowngermany.com/archive/german-mortgages.html
http://www.tradingeconomics.com/germany/bank-lending-rate