Where can you get the best German mortgage rate?
Here are three errors to avoid:
Every German mortgage website claims to offer the best interest rate and to search among 400 banks for the rate that serves you best.
Unfortunately that is not true. It is true that nearly all these websites check for rates through a standard consolidator which has information from all 400 or so German banks. So, indeed, all these websites should give you in a very narrow sense the best rate. But, in practice this search among 400 banks is quite meaningless, and does NOT serve the customer best.
10–20 of the larger banks do the bulk of the mortgage business and always have the lowest rates. The 20 largest banks account for 70% of all German bank balances, and only 45 banks actually deal on the mortgage financing market (Bundesbank). The claim of searching 400 banks merely serves to try to give you a false sense of thoroughness.
Indeed, you may have already caught on to the two main reasons why this search does not help to find you the best rate:
1. Most likely you do not qualify for this “best” rate. There can be all kinds of reasons. The nature of your job contract, the neighbourhood in which you try to buy your house, or the status of your visa. So instead of the wonderful 1.4% interest rate, your rate maybe 1.8% and it maybe offered by a bank that does not even score in the top five of best rates that you are shown in these websites.
2. Even if you qualify, the resulting mortgage is likely not the best mortgage for you. After all, picking the right fixed interest period (maturity), and repayment pattern is hugely complex and all these websites assume that you already know the right answer. The bank that comes out on top may not be the best bank when you select a different mortgage product.
And hence, as expected, what these comparison websites try to do is to try to get you to work with a mortgage broker, who then earns a quite handsome commission on your business.
Now you may say: “Well ok but these advisors may still get me to the best rate after they figured out what mortgages I qualify for, and what the best mortgage is for me. After all they do have access to information from 400 banks!”
Alas, that is not the case.
Here are the three main reasons:
1. The advisors may earn more commission from a bank that charges a higher rate and they may steer you to that bank.
2. Virtually all mortgage advisors actually lack the ability to search the database of mortgages for the best rate. While they do have access, they can only search for one mortgage product at a time. So perhaps they can search product by product, but they have limited scope to find the true best rate on multiple levels. Let me give you an example.
If my house costs 300.000 €, and my purchase cost are 20.000 €, I could pay down 25.000 € and get an interest rate of 1.9% from Bank A. But it is really important to know at what down payment Bank A drops my interest rate. If Bank A drops the rate to 1.8% if I pay down 25.500 I could save massively by paying down another 308 Euro. Actually, about 3000 € over 10 years.
Imagine now that it is Bank B, whose interest rate is 1.75% if I pay down 26.000 Euros, and you understand why a mortgage advisor, who can only search for one option i.e. one down payment at a time has a very hard time finding you the best deal.
3. Mortgage advisors have not been trained to help you choose the best mortgage and they lack the tools to do so. So even if they find you the best rate. It is the best rate on the wrong mortgage product. Mortgage advisors are trained to explain the risks and the technical aspects of the various mortgages. But most advisors have no idea how interest rates are set, let alone assess their outlook. It is not part of the curriculum or requirements for mortgage advisors. They lack the powerful tools to make or evaluate interest rate projections and the risk of cost in case you need to sell your house early or stay when rates rise.
Most people are keen to pay the lowest interest rate for your house of 300.000. You have found that a 10 year fixed rate is the lowest at 1.6%. BUT. Have you thought about the scenario where interest rates rise to 5% after 10 years?
Your key decision here is your fixed interest period — which is ultimately based on your expected income growth, your alternative investments, and projections for interest rates to assess if it makes sense to take this risk, in addition to your own comfort with risk. More on that below or here.
Where does that leave you? What are the three errors to avoid?
1. Don’t just trust any mortgage comparison website.
2. Don’t trust the recommendation of your real estate agent. They are not experts and it’s often a case of you scratch my back and I scratch yours.
3. You like your friends and use their recommendation for a broker that was really friendly and helpful. Most times however your friends don’t know what they could of saved.
So there is no easy solution. You have to do your homework. Evaluate the mortgage advisors based on content. Here are some tips for doing this. Check their website and examine or ask what tools they have to provide your advice. Can they quantify what the cost and risk of early departure is, and what the cost is if interest rates increase if your mortgage resets. Ask them what their advice is for your fixed interest period, your repayment pattern and downpayment. Ask them for their interest rate outlook and quantify the risks for you.
Our Alternative
At Hypofriend we have equipped our mortgage advisors with tools that not only give you the best rate, but find you the best rate on the right mortgage product. Using advanced algorithms we tailor the product to your situation and match you to the right bank.
Feel free to test our recommendation product here: www.hypofriend.de
