Germany is a nation of renters. A report suggests that as high as 58% of Germans live as tenants in rented properties. This low home tenure rate is something difficult and puzzling to understand for people from outside, especially since several factors speak in favour of acquiring a home in the overseas hotspot.
Despite the fact that the rates of interest for mortgages have increased in Germany, of late, they are still among the lowest amongst the major economies. Longer fixed interest rates are also incredibly appealing in the European nation, specifically the 10-year fixed rate. Besides, you can get very large sums financed here, and in some circumstances, you can even get full financing, and this includes the purchase expenses.
Top 3 Ways to Finance Your Home in Germany
You have several good options to finance your home here in Germany. The 3 below are the key ones:
Annuity Loan
This is perhaps the most popular option. An annuity mortgage is a fixed-rate loan over a period of five to 30 years and the monthly installments stay the same for that specific period, throughout the life of the mortgage. In the beginning, you pay generally interest, with a small amount being used for repaying the original loan. Over a period of time, as the loan is slowly paid off, while the interest portion nose dives, the repayment portion heads north.
For instance, let’s assume you want a loan of EUR 480,000 and have aligned an interest rate with the bank of 3%. Besides the interest rate, you will also be re-paying the loan every month. Let’s also assume you have a repayment rate of 2% – which is rather common. In such a case, your annuity will be 3% + 2% = 5%. In this case, your monthly installment would be 5% off EUR 480,000 divided by 12. This means EUR 2000.
In an annuity loan you, will be repaying your loan on a monthly basis and therefore cutting down the principal. By doing so, the interest amount of the following month will drop. But as the monthly installment is constant, the value of repaying the principal amount will head north in the next month.
Interest only loan
Also called Bullet Loans, Interest Only Loan is another good choice to finance your house in Germany. Here, let’s assume you will be obtaining a loan of EUR 480,000 from a bank at a fixed interest rate: say 3%, and only pay the interest amount to the bank.
Here, the repayment of the principal amount will be put on hold for the period of the contract, let’s say, 15 years. As a substitute for repayment, both parties will agree on a so-called repayment surrogate. This will be saved independently to be used at the end of the term to repay the loan or parts of it. Insurance policies, building society loans or investment funds are some examples of such surrogates. This surrogate will then be given to the bank as collateral.
The drawback is that the amount of interest you would be paying in the 15 years will be comparably higher, vis-a-vis in an Annuity Loan, as you won’t be repaying any principal through the loan period of the contract.
Significantly, some investors use this financing option as it gives them the chance to offset the value of interest they are paying as an expense in their tax declaration.
Variable Loan
Another excellent option to finance your property is a variable loan. In this option, you are not aligning on the duration of a loan contract. With this type of mortgage, you can gain from fluctuations in interest rates, which may allow quicker repayment.
As mentioned earlier, the interest rate will be variable and may change on the basis of the Euro Interbank Offered Rate (EURIBOR).
The best thing about Variable Mortgages is that they are flexible, and this helps you to either make larger payments, or end the mortgage minus any penalties. The only drawback is that not every bank will provide you with a variable loan as the administrative work to offer this loan is nearly as much as giving an annuity loan.
You have some more good options. Check with the professionals dealing with home loans. They will guide you in a proper way so that you can make the best possible decision and choose the finest available option to finance your home in Germany!
Final Thoughts
Annuity Loan, Interest Only Loan, and Variable Loan are th;e three most popular loan options to finance your home in Germany. All these have both pros and cons. Check with the professionals dealing with home loans. They will guide you in a proper way so that you can make the best possible decision and choose the most suitable option to finance your home in Germany!
