Once leading a simple life of little means, some of us are now facing the realities of adulthood. Enough with wasting money on rent, it’s time to buy property to call “home”. The prospect is exciting but the road is long, and the hurdles numerous. Some of them are particularly harsh on foreigners like us; language barriers and lack of local rules/market knowledge for example. It’s just simply not nice to feel ignorant or fooled by the bank mortgage specialist (I’ve been there, i know).
While it is a regulated market, some German banks will sometimes withhold information that could be beneficial to you. Here is a selection of what you should probably know about before you apply for a mortgage, and after too.
7 things you need to know before mortgage applications:
1- Don’t believe everything you read online.
The interest rates quoted online are not realistic rates, these are used to catch your attention only, like on Immobilienscout24. For example:
The top three providers quoted here are brokerage services and not mortgage lenders, hence they do not set the interest rates, but they only pay Immobilienscout24 a fee to be listed there. The interest rate can only be determined once the property value is determined among others, because this is the value that you are borrowing against and determines the loan-to-value ratio (the ratio of the loan to the property value), the most critical component in determining the interest rate. Hence, you should be skeptical of interest rates comparisons that do not ask for the property value & loan amount.
Variables that affect the interest rate include: the loan-to-value ratio, the loan amount, the fixed interest period length, and bank specific conditions like the proximity of the property to where you normally live.
2 – Discrimination is (sometimes) a thing
While banks say they don’t discriminate, they do offer different conditions to different people based on things like EU residency. For example, your residence status has a large impact on your borrowing limit. While EU permanent residents can borrow up to the entire value of the property, limited or temporary non-EU residents can borrow at most 90% but usually only 80%. This means that as a non-permanent resident buying in Berlin, you need to cover the purchase fees of 15% and add up to 20% equity to cover the down payment.
3 – Only your recent income history counts
Banks do not care about your future job plans. Banks only take your current employment into consideration, so if you expect a large pay increase soon, it may make sense to wait with purchasing a property. To verify your income, your last 3 payslips must be submitted if you are employed. If you are self-employed you may be required to provide your profit & loss statements for the last 3 years. Banks will use this to determine your monthly disposable income to understand whether you can afford your monthly payment, both in good scenarios & bad scenarios.
4- Your age matters
Banks don’t tell you that your age is a critical factor in deciding your monthly rate. Age is is relevant because it determines your minimum repayment rate, as most banks will want to guarantee that you are done repaying by retirement, or have an adequate pension already built-up for repaying your mortgage at that time. Older people often struggle meeting the income requirements because they are required to expend more of their income to the monthly payments.
5- Some banks will try to undervalue a property
Banks use different property valuation methods (e.g: Sprengnetter), hence what you pay may not be the property value that they give you. Some banks even systematically put a lower value on the property then what it sells for. Banks may send a surveyor when the property is above 500.000 €, sadly this tends not to work in your favor. As banks are relatively pessimistic, they will use a low property value to inflate your loan to value, which may drop you into a higher interest rate bracket.
6- Banks won’t always tell you the whole story
Generally, bank’s interests are not aligned with yours, that means they may benefit from withholding information around conditions or fees. For example, if you do not explicitly ask for “Bereitstellungszinsfrei” period you may catch yourself being forced to cough up extra interest payments even if the construction on your property is not finished or the full amount is not actually paid out. The standard maximum “interest free period” is 12 months, some banks may offer up to 24 months but this comes at a premium. Additionally, it is quite standard in Germany to pair a government-sponsored loan from the KFW with a bank loan. The KFW loans often carry more favorable terms and lower the overall interest cost as the bank regards this as equity, because it takes out the risk on their own balance.
7- Don’t settle for subpar products
Just in case you do not close a mortgage with your bank, because you for example decide to wait to purchase a property. Some banks may try to sell you a complicated financial product in the meantime, called a “Bausparvertrag“. This savings contract works similarly like a mortgage, where you agree on a loan amount, an interest rate, and a monthly payment that you place in a savings account every month. This savings contract is then paired with a mortgage at an agreed upon point in time and acts like a down payment. The interest you gain on the money you put aside is very low and is often not worth it and it’s not guaranteed that you receive the loan at the end of the period. What is guaranteed is that their is a 1% closing cost, whether you end up using it or not. So be warned. While bank independent mortgage advisors are legally required to state how commission they earn, banks are not held to the same standards.
When going for a mortgage, you can always shop around. For this, it’s a good idea to consult independent experts. Hypofriend is one of them but it’s a new kind of expert. Hypofriend is a platform providing you with a free online recommendation and together with their friendly English-speaking experts you can be sure to get the right mortgage from over 400+ partner banks. Their service is free and just like any broker, they get paid by the bank. Hypofriend prides themselves in their transparency and will always share details about their commission up front in the consultations, unlike most banks.
3 things you need to know if you already have a mortgage
1- You are not tied to your bank forever
Banks won’t tell you that you can use your right to cancel your mortgage after 10 years, and refinance with another bank or sell your property tax-free, as stipulated in the German Gesetz. Banks may charge you hefty penalties if you decide to break your contract before this 10 year mark. These penalty fees are the difference between the current rates on government bonds (that are lower than mortgage rates) and the interest rate that you have fixed with them. This is referred to as “Vorfälligkeitsentschädigung”. This makes it difficult to fix and flip properties.
2- You can refinance your mortgage and find better deals earlier than what you think
Banks won’t tell you that you can close your follow up financing up to 5 years before your earliest refinance date with a so-called Forward mortgage. This unique financial product allows you to lock in the interest rate for a loan amount at the end of your fixed period or at the 10 year mark, whichever comes first. Banks don’t like to tell you as you might get a much better rate when shopping around, as your financial situation and your loan to value ratio have much improved. Your own bank may not give you much credit for that.
3- Early repayments can save you money
During your mortgage, you may notice that interest rates are rising. Sadly, banks won’t warn you about this. If you are weary that at the end of your fixed interest period, you may be left with a hefty loan balance and need to refinance at a higher rate, there are measure you can take to decrease the loan balance. Be sure to check your mortgage contract to see if you can make use of “Sondertilgung” or extra-payments annually. This may allow you to accelerate your repayment by paying anywhere from 5% to 10% back on an annual basis.
The content in this sponsored post is based on industry insights and expert advice. It was written by Nick Mulder, an expat who got the wrong mortgage in Berlin and ultimately went on to found and build out Hypofriend, a certified German mortgage broker, using technology to help clients find the right mortgage for their situation. Hypofriend helps you find out how much you can afford and which conditions are the best for your situation, all of this in plain English.