7 factors affecting your interest rates in Germany

Even if banks like to advertise real estate loans having a particularly favorable interest rate, only very few get this minimum interest rate from the advertisements. The small asterisk behind the percentage sign indicates that interest rate is influenced by many factors which either drive up or keep down the cost of your loan.

Here we explain what these factors are and what tricks you can use to get the best interest rate for your mortgage.

Factor 1: The key interest rate EURIBOR

The interest rate charged on a real estate loan depends primarily on the EURIBOR (Euro InterBank Offered Rate). This is a series of interest rates at which banks can lend money to each other for short periods of time. It depends on the economic situation of the euro zone (inflation, supply and demand, etc.) and also has a significant influence on interest rates for private individuals: if it rises or falls, the interest rate situation changes for you as well.

Factor 2: Your loan amount & term

With a mortgage, banks try to assess the risk that the borrower is unable to repay the debt. If this risk increases, the bank secures itself with a higher interest rate in order to be able to compensate for losses in an emergency.

The higher the loan and longer the term, the higher the lender anticipates the risk — this will be reflected in the interest rate. Therefore, try to raise as much equity capital as possible and set a high repayment rate so that you can pay off your debt more quickly.

Factor 3: Loan-to-value ratio

The mortgage lending value is the monetary value of your home determined by the bank. This is how the bank determines its possibilities of making a profit from the property in an emergency (e.g. by selling it).

It is always below the purchase price of the property, usually around 70–90%, and is usually the maximum amount the bank will be willing to grant you for financing.

The loan-to-value ratio indicates what percentage of the lending value is financed by the bank. If your property has a lending value of €300,000 and you need €240,000 to finance it, then the loan-to-value ratio is 80% = €300,000 / 240,000. Most loan-to-value ratios for home financing are between 50% and 110%.

Factor 4: Collateral equities

Collateral in this context refers to a material value that you assure a bank in the event that you are no longer able to meet your payment obligations.

The best-known example of this to take a mortgage out on a current property you own. It is entered in the property registry for the new real estate and gives the bank the right to sell the property in the event of missing capital. Another popular collateral equity is using your life insurance policy.

Factor 5: Your SCHUFA score

In Germany everyone has a SCHUFA score a.k.a. Credit rating. Information from SCHUFA about unpaid invoices, increasing overdue notices or existing loans reduce your creditworthiness in the eyes of lenders and thus provokes higher interest rates.

An entry will then remain in the file for 3 years, beginning with the end of the year of the entry. If you have received an entry in March 2015, it will not be removed until January 2019. Once your debt has been paid, a completion note will be attached to the entry which will slightly improve your score.

Before you start your housing project, it is therefore essential that you obtain information from SCHUFA about yourself and take a look at your situation in order to check for incorrect entries.

Factor 6: Your marital status & age

Your age and quantity of children also influence the interest rate. A father of two can be dismissed less quickly than someone without children in the same job, thus having a positive effect on your interest rate.

Couples also get better interest rates compared to individuals. However, this only applies if both have a good income or can alternatively deposit equity.

In addition, you will receive higher interest rates at an older age, as the banks have rationalized the risk of loan losses due to illness, incapacity to work and death by the end of the term.

Factor 7: Your income situation

The banks are not only looking at how high your income is, but rather they look into how much of your income you spend and how much capital remains in your account at the end of each month.

A permanent job is still advantageous; self-employed people may have to deal with higher interest rates since their income is less consistent.

People still in the probation period or on a fixed-term contracts also find it difficult to obtain low-interest loans; some lenders even reject them completely.

Conclusion: What you can do to get the best possible interest rate?

There are many influences on the interest rate that cannot be changed, such as the Euribor interest rate. However, with good planning and vigilance, you can still get a better interest rate if you consider doing the following:

• Collect as much equity before you finance in order to keep your loan-to-value ratio as low as possible
• Check your SCHUFA score information for errors and try not to accumulate open invoices. Pay off existing loans before taking out a new one
• End your probationary period at work and try to get a permanent employment contract
• Use collateral equity for your mortgage if you own property

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