German Mortgage Market

Introduction

House prices on the German property market are still rising but slower than in the last few years. Europace figures suggest a significant slowdown in the year-on-year price increase from 11.2% in September 2013 to just 1.9% in April 2014. However, making general statements on the developments in the German housing market remains difficult as data depicts huge differences and dynamics between German cities. Hanover, Hamburg, Dresden and Berlin for instance, experienced a sharp increase in property prices per square meter during Q1 2014, ranging from 7.24% in Berlin to 12.49% in Hanover. Latest figures from other cities – especially those in West Germany such as Dortmund (3.59%) or Frankfurt (2.57%) – underscore the general trend of further price stabilization in the housing market.

According to S&P the residential real estate price growth will continue to decelerate as alternative investment products become more and more attractive in Europe and Germany. The latest quantitative easing program adopted by the ECB led to rallying markets and ought to slow down upward dynamics in housing prices. However, especially small apartments in growing cities remain an appealing asset class for institutional investors with Germany absorbing cheap workforce from all over Europe. 

With regard to homes for self-use the major German mortgage bank (Deutsche Genossenschafts-Hypothekenbank AG) indicates that the demand for affordable housing is still considerable. Young families take advantage of the cheap financing available but the German Central Bank (Deutsche Bundebank) warns that the current attractiveness for big mortgage loans might bear long-term risks and holds that dynamics must be monitored carefully.

Purchasing Property in Germany

There are no restrictions on foreign nationals to buy property in Germany. Although German banks offer financing options to foreigners, they should not be expected to cover more than 60% of the purchase price. Round trip transaction costs include lawyers’ fees, notaries’ fees, registration fees, tax and agents’ fees. Those costs range between 9.02% and 16.34% (up to 21% in Australia) which makes Germany a rather cheap place to invest in housing property.

The process of purchasing property in Germany involves several steps with different parties involved. The seller’s offer has to be made via an agent, who usually charges fees between 3% and 6%. Before the signing of the contract a notary has to draw up the contract and supervise the closing (fees up to 2% of the purchase price). Furthermore, the financing must be secured by the buyer in form of a bank guarantee or a comparably strong legal promise by the financing party. The subsequent transfer of money is to be processed by a notary and again notary fees fall due. The legally necessary registration of the change in ownership triggers the registration fee, which varies from state to state. Furthermore the Property Purchase Tax of up to 6.5% of the purchase price must be paid as soon as the transfer of ownership is registered. To complete all these steps it takes an average of 95 days.  

Financing Options

Standard Mortgages

Fixed-rate Mortgage

The most common and secure type of mortgage in Germany is the fixed-rate mortgage. The interest rate is contractually predetermined for the entire term of the loan agreement, usually 15, 20, or 30 years.  With more maturity the proportion of principal payments will increase but the amount of monthly repayment will remain the same throughout the whole contract period. Although this type of mortgage provides for high financial predictability and protection from increasing interest rates, the home owner might not be able to capitalize on positive market developments. 

Adjustable-rate Mortgage

The adjustable-rate mortgage (ARM) usually offers a lower initial rate of interest than fixed-rate loans.  Contrary to the fixed-rate mortgage the interest rate follows a base interest rate, typically adjusted every three months. Essentially, the base interest rate is determined by the Euribor (Euro Interbank Offered Rate), which indicates the interest rates major European banks offer each other for short-term loans. The long term exposure to financial markets makes the adjustable-rate mortgage a smart investment if interest rates fall. However, a further decrease in central bank interest rates seems unlikely after the ECB has drawn almost every monetary instrument available to provide for low interest rates. 

Building Savings Contract

The chief advantages of using a building savings contract instead of a traditional loan are government subsidization (“Wohn-Riester”) and tax incentives. The building savings contract allows potential home-buyers to save money with attractive interest rates in advance and subsequently borrow the necessary amount to finance a property acquisition under equally favorable conditions. Although the interest rates for both saving and lending are generally low they are predetermined by law. In the current environment of low interest rates the incentives for building saving contracts have mitigated.  Furthermore, this type of property financing might trigger additional transaction costs and should hence be carefully considered.

Mortgage combination

Many new homeowners choose a combination of these types of mortgage loan contracts. By adjusting mortgages to the individual needs of clients, banks ensure that young families may buy their own house even though their initial income would not be sufficient to repay all their debt. For instance the initial interest rate may be significantly lower than the final rate and a contractual option to extend the maturity may be included. The competition between German banks is huge and comparing the broad variety of mortgage options the market offers is therefore highly recommended.

 

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