Mortgage Process in Germany
So, You are planning to buy your first apartment and want to take a mortgage for the same. However you have no idea how it works in Germany. Don’t worry, after reading this article , you will know everything there is; about getting a mortgage. If you do not want to read, here is the video which explains everything, I have written down below.
In my previous article, I explained the whole process of buying an apartment in Germany. If you haven’t read it yet, check it out. It will make you aware of all the steps involved in buying an apartment in Germany.
I have divided this topic in 2 parts.
- Terms used by banks in Germany
- Who to contact
- What information bank need to give an offer
- Documents required by the bank
In this article I will discuss Part 1 only and for part 2 check my other article. In part 1 we will check 3 things. First we will understand the terms used by the banks in Germany. Then we will see whom to contact and how to get a credit. Finally we will check what information bank requires about you and the apartment to give you an estimate or an initial offer. Part 2 will be covering the paper work required in the mortgage.
Part 1.1: Terms used by bank in Germany
Lets check part 1 and understand the terms used while discussing mortgage details with bank.
First term is Darlehensbetrag. It means how much credit you want to take from bank. Do you want to take 100% of the purchase price as loan or less than that. If you decide to take less, then you have to prove bank that you have rest of the amount. You can even take credit of more than the purchase price. Some banks even finance the Nebenkosten. Nebenkosten is the cost involved during the whole buying process.
Getting finance for Nebenkosten is rare and the interest rates would be higher. However the option is there. Other scenario where you can get more credit is for renovating the apartment. In this scenario, usually the interest rates does not increase or vary that much; however depends on your profile.
Next term is Tilgung. Tilgung is the monthly installments you will pay to bank. In Germany it is not mandatory to pay off complete credit within your mortgage time period. You can finish 20, 30 or any percentage of mortgage within your credit period. Usually bank will ask you how much Tilgung/monthly rate you would like to pay. You can answer it in 2 ways.
- First way is to tell them how much monthly euros you are willing to pay.
eg: 600 euros every month.
- Or you can tell them in percentage. eg: 2%. So what does that mean? It means you want to pay off at least 2% of the mortgage amount every year. So bank will take 2% of your mortgage amount and add the interest you need to pay in it. Finally divide that sum by 12 to give your monthly installment.
Lets take an example to understand it better. Lets assume you took a mortgage of 200k and want to pay a Tilgung of 2%, which means 2% of 200k ie 4k per annum. Consider the interest rate to be 1%, which mean 1% of 200k ie 2k per annum so our monthly installment according to our formula will be (4k + 2k/12) = 500 Euros.
Mortage = 200k
Tilgung = 2% => 2% of 200k = 4k per annum
Interest Rate = 1% => 1% of 200k = 2k per annum
Monthly installment = (4k + 2k) / 12 = 500 Euros
One thing to note here is, as you pay your monthly installments, your principal amount will reduce and hence the interest you are paying. So with time, you will be paying back more than 2% of the principal every year. That is why I said at least 2% in the beginning.
3. Sollzinssatz: Interest Rate
Sollzinssatz, which means the interest rate. At the time of writing this article, we have historically lowest interest rates in Germany.
4. Dauer der Sollzinsbindung
Next is “Dauer der Sollzinsbindung” meaning the duration of fixed interest rate or mortgage period eg:(10, 15, 20 years). Usually longer the period, higher the interest rates. So you need to break a balance between the duration, monthly rate and interest rate.
For investors, who are planning to rent the apartment; low monthly rate is more important than lower interest rates. Similarly for people who are buying for their own use; low interest rate might be more important. One more thing to keep in mind is currently in Germany interest rates are fixed and i would also recommend to have it fixed. This way you are protected in case interest rates goes up.
Sondertilgung, which literally translates to special payment which means that you can pay off x percent of the loan amount, once every year, free of charge For example, if you have 5% of sondertilung; that means you can pay 10k extra once every year without any penalty.
Having sondertilgung and paying it every year is completely optional. So you can have a sondertilung option in your contract, however it does not implies that you have to pay 10k every year on top of your monthly installments. You can decide how much you want to pay. You can either pay 2k, 4k or nothing if you want. Whats good about sondertilgung is, you can reduce your principal amount quickly and hence pay less interest to bank.
Its also good to know that, if you do not take sondertilung as an option, it reduces your interest rate slightly by 0.01 percentage point.
It is the credit amount left after your mortgage tenure. As we discussed earlier you don't have to finish your credit within the credit period. So some amount will be left after your credit period and this amount is called Restschuld.
You can refinance the remainder with the same or different bank.
Part 1.2: Who to contact
Now we know all the terms used by the bankers in Germany, lets check who to contact for getting a loan. I would suggest, first go to an independent broker like interhyp or dr klein or check 24 or loanlink. The broker’s job is to find the best possible offer for you and in return he gets a commission from the bank.
Well, My primary purpose of going to a broker is not to get a credit, but to get the information about it and to have an idea of the market.
You can ask them all kinds of questions or doubts you have, For example
- how much credit you can get,
- documents that are required,
- whether you are eligible to get a credit in Germany or not
- you can even ask them questions related to buying and selling process.
So they are a good source of information and sometimes you even get a good deal for your mortgage. However important thing is, if your broker tells you that you can get an offer, do not believe his words blindly. He is just a middle man between you and the bank. Only bank can tell whether you will get a particular offer or not.
I have experienced it the hard way. I went to a broker and he said i can get an offer which was very good. And when the time came, he gave me a completely different offer, which you can guess was really bad. I have even heard from sellers the bad stories about these brokers. So, Some sellers don't even consider to look at the letter provided by a broker stating you are eligible for a credit. So, visit them, get information and offer, but do not plan your purchase on their word.
Do not plan your purchase on the word of a Broker.
This is when the banks come in picture. Once you have an idea about the market and know what you want, go to the bank, where you have an account
and ask them for an offer. If your home bank gives you an offer, even verbally, that has more value than a broker’s written letter.
Part 1.3: What information bank need to give an offer
Now you know whom to contact. Next step is to check the information bank will need to give you an offer. Bank will need information about you and the apartment you are planning to buy. Lets see what data bank needs about you.
- Net monthly income
- Source of your income; whether you are employed or run your own business or have any rental income, etc.
- Bank will also be interested in how much savings or cash you have to cover the nebenkosten.
- Your living situation, whether you are living in a rented property or of your own. If you are living in a rented property then what is the rent.
- Do you have any other loan/credit. If yes, how much it is and for what purpose.
6. Information about the apartment.
- First thing here bank would like to know is, in which price range you are looking for an apartment.
- Next is, whether you are planning to buy a new or an old apartment. If it is an old apartment, there is a possibility that it needs renovation. So some banks even finance the renovation costs.
- Lastly whether you want to rent the apartment or live in it yourself. This helps bank to know how much rental income you can get if you rent the apartment or how much rent you can save if you live in that apartment yourself.
Well once bank have all this information, they will tell you an approximate range within which you can get a credit.
Ask bank to give the same in writing, so that you can show it to the seller during your visit.
To issue such letter, bank may need an exact apartment. So just give a dummy apartment within your range, which bank can use as reference. Bank may give you the letter at the same time or may take few days depending on who is our consultant. In one bank my consultant had the authority to give me that letter immediately after checking my profile and other took 2 days to give me the letter. Having this letter is optional, however I highly recommend to have it before your visit, as it immensely increases your odds to get an apartment. After this exercise you will know what you can afford and will also have that in writing from a bank.
So this ends our part 1, for part 2 check my other article. It will explain the documents and paperwork involved in this Mortgage process.
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