Mortgages in Germany
No matter where in the world you might consider buying property, taking on a mortgage represents one of life’s great opportunities to benefit from owning your own home or investment property but it also represents for most people the largest and longest term debt they will take on.
So getting the right structure and repayment schedule for you is highly advisable.
Sounds straight forward doesn’t it? But you have to remember that a mortgage is also a legal agreement (a loan). A failure repay of the loan can have consequences such as repossession of the property. This can also affect your ability to borrow money in the future.
We have seen many cases around the world in recent years of properties being repossessed due to in large part ill advised mortgage and repayment structures. In Germany however we have not seen this type of problem, mainly because of the conservative nature of German lenders.
For many expatriates who think about taking a German mortgage this mindset can be a little irritating. Coming from the UK or the US we are not used to what may seem as almost inquisitorial questions on our personal/financial situation.
Why is it this way? Well, German lenders will not only asses the value of the property that is going to be mortgaged but also – and this is just as important – the “value” of the mortgage-taker.
So let us be more specific on what factors have an influence on the evaluation of a mortgage-taker:
There is of course your income situation. Do you have a regular stable income and is this income enough to cover all your outgoing costs including future mortgage rates?
Are you in employment or self-employed? If you are in employment are you still within you probation period or do you maybe have a limited work contract? Both factors can be an obstacle when it comes to lending.
Should you be self-employed most lenders would want to see your German records (e.g. tax-statement, book-balancing. ) over the past three years. No less!
Age is also a factor as the closer you are to retirement the greater the risk assessment from the lenders point of view. Also new EU regulations require lenders to ascertain your possible pension income should the mortgage extend beyond retirement age.
Another major point is other debts that may be running. This could be another mortgage as well as the lease on a car or the installments for a new TV. The more debts – even small ones – you have running then the lower your mortgage rating will be due to an assumed lack of financial discipline. This is the way Germans look at everybody including themselves.
Last but not least, of course, all of your positive financial assets will be taken into account and add to a more positive assessment:
It is quite normal for German lenders to expect you to pay around 20% of the purchase out of your own pocket. This of course does not include closing costs. However, 100% loan to value mortgages are obtainable with the right circumstances.
Understanding the main types of mortgages that are offered in Germany can be a good place to start.
Fixed Interest Loans – Capital & Interest Repayment:
This is perhaps one of the most common types of property loan in Germany. With this type of loan the installments are the same amount throughout the repayment period. To begin with the interest portion of the installment is high and the repayment portion of the installment is low. As the loan is repaid the interest portion decreases and the loan repayment portion increases. The client can decide on the percentage for the annuity (in general no less than 1% – normally referred to as “Tilgung“) as well as the runtime of the loan. Clients can also decide whether they wish to make additional down payments of the loan (no more than 10% p.a. – normally referred to as “Sondertilgung“). Should the loan not be repaid by the end of the fixed runtime there will be the need for re-financing. Re-financing and securing interest rates at a current level (“Forward Darlehen”) can be arranged maximum 5 years prior to the end of an existing mortgage.
Interest Only Loans (Zinszahlungsdarlehen):
With this type of loan only the interest portion of the loan is repaid over a fixed term. This can make the repayments seem quite low. But of course the full amount of the outstanding capital of the loan is still due for repayment at the end of the term. Still this type of loan can be very interesting for investment buyers should they be German tax payers as the interest payments can be tax deductible. Should this type of loan be taken for long term mortgage funding then it is highly recommendable to make sure that other savings or assets can cover the outstanding loan at the end of the term.
Building Society Loan (Bausparvertrag):
Often you will find that an annuity loan is linked to a building society savings programme (Bausparvertrag). The instalments to be made are in part (or in total) paid into the savings programme which will be used at a later stage to pay off the mortgage. This type of loan is still popular in Germany and is promoted strongly by banks and building societies. We would however sound a note of caution with this type of loan as they tend to have quite a number of fees connected.
Variable Rate Loans (Flexibles Darlehen):
In this case the interest rate tracks the appropriate base rate, in Germany the Euribor (Euro Interbank Offered Rate), and is adjusted accordingly every three months. Once the Euribor-rate increases, the interest which has to be paid increases as well as vice versa. When someone decides to opt in for a mortgage based upon an adjustable interest rate (also known as a floating rate or variable rate mortgage), they are informed beforehand that they will pay the Euribor-rate plus an adjustment, for example Euribor +1%.
This type of loan in Germany has a number of options. A partial or full repayment of the loan can be made in general every three months. Also in many cases the loan can be turned into a fixed interest and repayment loan if necessary.
A variable rate loan can be a useful option for mortgage provisioning providing of course that Euribor is at a low rate. A close eye has to be kept on the development of the Euribor-rate at all times.
Last but not least – if you live in Germany and are a German tax payer – there are several state supported programmes that can come in useful should you wish to buy a property or build your own. Below you find two of the most important examples of such programmes.
Riester Pension Programme (Riester Rente):
The “Riester-Programme” is a state-run aid for private and company pension schemes. The German “Altersvermögensgesetz” (Retirement Savings Act) defines all the details and conditions. With this state supported programme the individual shall be motivated to care about his/her pension actively. The state shows support by paying certain amounts and/or guaranteeing tax incentives.
The “Wohn-Riester” can be a part of this and is a contract of loan to buy or build privately used real estate and cooperative shares.
In General everyone who is compulsory covered by the German statutory pension insurance can claim for such a programme. Also each marriage partner who does not have the right to receive aid his- or herself but whose marriage partner complies with the requirements. Additionally, the partners have to be fiscally connected.
KfW (Kreditanstalt für Wiederaufbau)
KfW bank offers different loan concessions for those who want to buy or build a home for themselves to live in (KfW Home Ownership Programme) as well as for everyone who is investing to make an older residential building more energy-efficient. Other loan packages can be arranged to purchase a newly refurbished home or for building/purchasing an energy-efficient home (KfW Energy-efficient Construction & Refurbishment).
What promotional funds are available?
Depending on the programme between EUR 50,000 to EUR 100,000 can be financed with the individual KfW programmes. Funds from different programmes may also be combined.
Why have a KfW loan?
In many instances KfW bank can provide a lower rate of interest and can have the overall benefit of lowering your mortgage costs.
We would like to point out one last detail. Often we are contacted by clients who were attracted by lending institutes with teaser rates but find that these rates have nothing to do with the final offer they are given. In this case – as in so many others – it is most important to read the small print first.
© FIRST Financial Direct Group OHG, 2017
Article contributed by First Financial Direct Group OHG
Owning property or land can for many people be one of life¹s best investment choices. FIRST Financial Direct Group is here to help make that choice as beneficial as possible and we will be with you every step of the way. This we can do by having access to some of the best mortgage rates & conditions offered by over 200 German and international lenders. So whether it is your dream home or an investment property you are looking for don’t hesitate to contact us. Let us help you make it happen!
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Insurance in Germany
In Germany, insurance is a good thing to have — health insurance and liability insurance for motor vehicles are mandatory.
If you are planning to spend more than six months in Germany, or have moved here in a job-related capacity, here’s a primer on other insurances you may want.
Third-party Private Liability Insurance
The most important and yet the least expensive insurance cover you will need in Germany is third-party private liability insurance (Haftpflichtversicherung). It will provide cover to you or to any insured member of your family in the event that you commit an act for which a German court would consider you ordinarily negligent.
Under German Law, there is no ceiling on the level of damages an individual could have awarded against them for an act they committed, even one committed innocently but carelessly, or for the misdeeds of their dog or horse.
Ordinary negligence could be a simple matter of damaging someone else’s property, for instance knocking over a vase while visiting a friend or in a shop, or causing an accident as a pedestrian by not crossing at the zebra crossing, causing bodily injury whilst skiing or engaging in other sports activities. Please note that dogs and horses must be insured separately and are not included in a single or family policy. This essential insurance is intended to give you more than just peace of mind and is strongly recommended and often contractually required, when you are renting a property.
Any damage claims can be painful and a high level of cover, (we suggest 50 million Euros for a family, less for animals) costs relatively little. Saving by taking out a cheap policy with limited coverage is very much a false economy.
Third-party private liability insurance will not provide cover for anyone driving a car, piloting an aeroplane, or sailing a boat; no cover is provided for hunting. All of these require separate insurance policies.
You should be aware that German third-party private liability insurances with either a three or five year term cannot be cancelled before the term is up. An insurance agent selling these term contracts will receive a higher commission for locking a client into a multi-year product. Our strong advice is to buy only annually renewable polices; there is absolutely no reason to take out a policy which leaves you unable to switch at a renewal date if a more attractive or a better quality insurance cover becomes available.
Household Contents or Home Insurance
Household contents insurance (Hausratversicherung) is necessary to indemnify you for loss of, or damage to your possessions. Included are all belongings contained in your home, such as furniture – including (optionally) built-in kitchen units -, clothing, collectibles, sports equipment, valuables and computers for personal use. Fixtures and fittings attached to the building and not owned by you are generally excluded as these are the responsibility of your landlord or the house owner under their own separate insurance policy.
The coverage includes the risks of fire, burglary, storm damage, water damage and/or vandalism. Coverage outside the premises (for instance, robbery) is often limited up to approximately 10-15% of the total insured sum. The risk of fire, water damage and theft from your home in your absence increases the longer you are away and you must notify your insurer if you intend to leave the premises for longer than 60 days. Some policies also include limited cover for damage caused by electrical surges.
If you are a tenant, you should be aware that your household contents insurance will not cover damages to any rental furniture.
The insurance sum is calculated using the replacement value of all your belongings; if your total household possessions are worth more than 75,000 Euros, there are a number of international insurance companies which offer all-risk coverage which may be of interest to those with art collections, jewellery and other items of considerable value. This cover is more comprehensive than is normal for standard German policies.
Bicycle thefts are a problem in Germany, where so many people use two wheels; additional insurance should be purchased, especially if more than one bicycle is owned or if the iron steed in your possession is especially valuable. Some insurance tariffs include coverage for bicycle theft, but this is by no means universal.
Breakage of window panes can also be insured separately; this is a good idea when the panes of glass are large and costly to repair and especially so when there are young children in the household who are prone to launching their harder possessions without necessarily aiming too consciously.
If you are self-employed and normally work from home, you must insure your office equipment separately.
The premiums for any household insurance cover depend on the area in which you live, the value of your possessions and the benefit levels you wish to have.
You should be aware that German household contents or home insurances with either a three or five year term cannot be cancelled before the term is up. An insurance agent selling these term contracts will receive a higher commission for locking a client into a multi-year product. Our strong advice is to buy only annually renewable polices; there is absolutely no reason to take out a policy which leaves you unable to switch at a renewal date if a more attractive or a better quality insurance cover becomes available.
Legal Assistance insurance
Both the German language and indeed the German legal system are probably radically different from the traditions and experience of most new residents. Misunderstandings or disagreements with employers, landlords, neighbours, local merchants, and tax authorities, not to mention parties involved in a car or perhaps another accident, happen often enough.
Legal assistance insurance (Rechtsschutzversicherung) could save you significant amounts of money and a lot of personal discomfort. This insurance can help protect your rights and allow you to litigate without having to spend your own money in advance without knowing whether you will win your case and having your legal expenses reimbursed at some later date.
Most people simply cannot afford to take the risk of going to court, especially when they don’t understand the language.
The attorneys’ and court fees in Germany are based on the amount in dispute. For instance, should you have a dispute with your landlord and need to go to court based on a disputed amount of 4.000 Euros, the court and attorney’s fees that will have to be paid in advance can be as high as 4.000 €. If you have legal assistance insurance and your claim is held to be valid by your insurance company, the insurer would take care of any necessary payments.
This insurance covers the costs of your own attorney, court fees, and witnesses, costs of the opposing side if you lose the case and bail outside Germany.
Good insurance will normally cover:
- Disputes with landlords or neighbours (3 month waiting period)
- Employment law (3 month waiting period)
- Unwarranted driver’s license loss, traffic accidents and violations
- Disagreement with the tax authorities (in court cases)
- Advice on inheritance issues (though not for disputes between beneficiaries)
- Claims for compensation for damages (personal injury or property)
It should be noted that the legal consultation concerning inheritance and family law is limited and that divorce is not included.
There are specialised policies available for self-employed people or those in senior management positions.
Accidental Death and Disablement insurance
Insurance which covers death or disablement (Unfallversicherung) is often forgotten or just ignored as it is uncomfortable to think about. It normally pays a lump sum in the event of a valid claim resulting from an accident.
As a rule of thumb, a policy for accidental death or 100% disablement should provide cover for 5-6 times the insured’s annual income.
Death is self explanatory, but there is a table of compensation rates for damage to, or loss of individual body parts; for instance, blindness in both eyes could receive compensation of up to 100% of the total insured sum, whereas the loss of a leg up to the knee could result in compensation of up to 50% and the loss of a finger up to 30%.
Many accident insurance policies will also pay benefits in the event of an insured child swallowing a poisonous substance.
This insurance must not be confused with occupational disability, critical illness or income replacement cover. Benefits under an accident insurance policy will not be paid if you become disabled due to an illness.
You should be aware that German accident insurances with a multi-year term cannot be cancelled before the term is up. An insurance agent selling these term contracts will receive a higher commission for locking a client into a multi-year product. Our strong advice is to use only annually renewable accident polices.
Term Life Insurance
Term Life insurance (Risikolebensversicherung) makes sense for those with a family and/or mortgages, as it will provide a lump sum in the event of an insured person’s death by practically any cause. This insurance is inexpensive and the cost is based on the age of the insured at the start of the insurance, the insurance sum itself, the insurance term and the medical history and smoker status of the insured person.
For those with existing term life insurance from their home country, it is important to receive confirmation from your existing insurer that the policy is valid while residing in Germany.
Annual Travel Insurance
An annual travel insurance policy (Reiseversicherung) offers comprehensive insurance cover for each private (or if you are self employed, also business) trip without the need to purchase a new policy for each journey.
An annual travel insurance policy will normally pay for itself after your second private journey overseas. There are no limits on how often you can travel, with global coverage barring known war zones. You should be aware of the normal maximum duration of each trip which, depending on the chosen tariff, can lie between 31 and 42 days. In the event that you wish to undertake a longer trip, this should be advised to the insurance company in advance.
An annual travel insurance package will normally include the following benefits:
Travel cancellation insurance
Reimbursement of cancellation fees arising from an inability to travel due to an accident or a serious illness. This is normally only worthwhile as a standalone product, for trips which cost at least 500 Euros per person.
Trip curtailment insurance
In case you cannot finish your trip on schedule, any additional costs for the return journey will be reimbursed. You should be aware that depending on the severity of the grounds for curtailing your trip, some insurance companies will also reimburse the value of the unused portion of a curtailed holiday.
Travel health insurance
This will reimburse the costs of necessary medical treatment overseas for acute illnesses as well as any necessary repatriation of the insured in the event of an emergency.
If you are or will be in the German Government Health System, we strongly recommend that you purchase an annual travel health insurance policy which will cover you for emergency hospital and out patient treatment, medically advised evacuation and emergency dental care when outside Germany.
Travel luggage insurance
The present value of your possessions and luggage in the event of a theft or robbery, or the costs arising from damage to or the disappearance of your possessions while being transported, will be reimbursed; up to the maximum limit set within the policy.
The majority of insurance companies offer assistance via their hotlines in case of emergencies.
Insurance Information supplied by Matz-Townsend Finanzplanung. Copyright 2017. All information as per January 2017 – no guarantee for accuracy or completeness. Published with permission from author.
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