European mortgages explained: Germany

There are many particularities regarding mortgages in Germany.

Several requirements need to be fulfilled to qualify; they differ from employees to self-employed and freelancers. Unfortunately, each lender has its own set of criteria which makes qualification a difficult process. But there are general guidelines and specific required documents. These documents have to be provided to the lender in German language.

  • German self-disclosure questionnaire
  • property assessment
  • proof of employment (2–12 months of payslips)
  • freelancers must provide additional proof of income and net worth including two years of balance sheets, business, and economic evaluation, and prior year’s tax returns
  • latest tax returns
  • proof of available equity to cover the purchase fees
  • Extract from the Land Register for the previous six weeks

In addition, foreign buyers will need to provide copies of their passports and, in some cases, a residency permit. Of importance is also the disposable income which is calculated by taking the monthly net income and deducting all recurring fixed costs, like insurance, rent, etc. For average incomes, a general rule of thumb is that the mortgage monthly payments cannot exceed 40% of the net income. For higher incomes the ratio may be somewhat higher, for lower incomes somewhat smaller. For self-employed it will be lower as many banks tend to assume high insurance costs, and hence banks often require a minimum net monthly income of about 2,000 Euros.

There are different types of mortgages that need to be assessed:

Fixed-interest loans are a common German mortgage. The borrower can set the terms for the rate of principal repayment (typically between 1% and 10% of the principal amount over the term of the loan), and whether to make additional principal-only payments (up to 10% of the outstanding amount). At the end of the loan term, any outstanding principal must be paid in full either with cash or further financing.

With Interest-only loans, only the interest portion of the loan is repaid over a fixed term. The full amount of the outstanding capital of the loan is still due for repayment at the end of the term.

It is possible for German residents to deduct the interest payments from their annual income taxes.

Building Society mortgages are linked to a savings account. These mortgages are typically characterized by long-term, low-interest rates. There are two models: either you save in designated savings account until you become eligible for a mortgage, or you take out the mortgage and submit repayments into a savings account that is later used to pay off the mortgage.

Variable-rate loans have, in contrast to fixed-rate mortgages (annuity, full repayment mortgages), variable rates of interest. Every three months the interest is adjusted to reflect that of the European Central Bank. It allows borrowers to take advantage of fluctuations in interest rates to enable quicker payment as well as permitting them to make larger payments or terminate the mortgage without penalties. Variable-rate loans will often be combined with other fixed-rate mortgages.

Wohn Riester is a kind of state-subsidized real estate loan or homeowner’s pension. The so-called deferred taxation is applied to the homeowner’s pension. The contributions remain tax-free, only the tax on the pension itself has to be paid – at the personal tax rate. The contributions and subsidies, including an assumed interest rate of two percent, are to be posted to a fictitious “housing subsidy account”. However, the account cannot be accessed, as the credit balance posted there is transferred to the real estate subsidy and, in principle, no longer exists. At the start of the pension, the Wohn-Riester saver also receives notice of his or her tax liability that has accumulated in the imaginary account over the past few years. There are two options: Tax everything at once: As a reward, one gets a 30 percent discount. Or gradual taxation: In this case, one can pay their tax debt in installments over a period of up to 23 years.

 

This article was written by Magdalena Szabo, a German apprentice studying Business Administration.

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