Congratulations on planning for a dream house in Germany. After all, you are about to embark on a challenging journey that will be very exciting. However, it must always be said that the financing process would be quite different from buying a plot or an existing property. Here’s a walk-through for you about the different dimensions of financing a plot of land and constructing your dream home.
How Does Property Financing Work in Germany?
You will have to make a crucial decision when purchasing a house:
Do you buy a ready-to-live-in property?
Or, do you buy a piece of land and build your new home?
If you choose the latter, you’ll also have to decide between:
Buy a piece of land and hire a Bauträger to build a turn-key property for you.
Buy the plot and find a building company that will build your new home.
Here’s a closer look at both options and their financing implications.
Option 1: Separately Finance the Plot and New Construction
Why Choose Separate Financing?
This option best applies when:
You want flexibility in choosing your construction schedule or timeline.
You must obtain funding for the plot and house separately.
Financing the Plot: Annuity Loan
You can also finance a plot with a standard annuity loan, which is fixed monthly repayments and fixed interest rates for 5, 10 or 15 years. You can end up being tied to one bank because of the land charge system .
Understanding the Land Charge
When one finances a property, the land charge is registered in the land register by the lender. The first bank listed will be the creditor first-ranked, which in the event of foreclosure will get priority over the other. When you take a loan from another bank, that bank will be second-ranking creditor, more at risk and consequently more expensive in interest rates.
The first bank, knowing your dependency, might also charge you a higher rate of interest for the second loan. Because annuity loans are interest rate-linked, you’re really stuck with the first bank for many years, unless you pay hefty penalties to exit the loan.
Funding the Plot: Variable Loan
Or would you rather have a variable loan, with interest rates that are not fixed? Instead, they fluctuate at certain intervals depending on market forces. The advantage?
You can terminate the loan after giving four weeks’ notice.
You can switch to another bank when you apply for a construction loan.
Example: Financing with Variable Loan
Assume you need €120,000 in financing for the plot, and you take on a variable loan. Later, when you are ready to construct, you arrange a €400,000 fixed annuity loan. You can pay off the variable €120,000 by having that part of this new loan drawn down, so the new lender will take priority. In this way, you avoid being held up by the first bank and are able to achieve better terms for the construction loan.
Option 2: The land and construction finance together
If you buy both the plot and the new building from a single source, such as a developer, the financing process is simpler.
You’ll have one loan and one contract.
The same lender covers both the land and construction costs.
You’ll only need one notary appointment, reducing administrative hassle.
This option eliminates concerns about land register rankings and ensures a smoother process.
Land Costs: What to Expect
Land prices in Germany vary very much depending on a location and size. For example:
Urban locations: Munich, Frankfurt, Cologne – high land prices.
Rural or small-town areas are cheaper.
Ancillary Costs: Cost Factors to Bear in Mind
When buying property in Germany, consider the following additional expenses:
Land Transfer Tax: Varies between 3.5% and 6.5%, applied by each federal state.
Estate Agent Fees: Generally from 3 to 6% plus VAT.
Notary and Land Register Fees: Up to 2% of the purchase price.
Other costs may include surveying, development fees, soil surveys, and road or path costs.
Saving on Costs
Purchasing Separately
When you buy the land and building in separate deeds, you only pay the land transfer tax on the plot. To qualify for this, ensure that:
The contracts of purchase are different.
At least 12 months have passed since the lands were acquired and up until the contract was signed for the construction.
Buy various lands and buildings from different vendors.
The tax office checks on the sale of such property to prevent tax evasion. In case they find out that these are connected transactions, you will be surcharged with the total real estate transfer tax upon retroactive effect.
Conclusion
Building your dream house in Germany is a worthwhile pursuit, but it requires careful financial planning. Whether you choose to finance the plot and construction separately or together as a package-understanding your alternatives will save you money and worry.
Once you are certain, discuss your options with financial planners and make sure your financing strategy aligns with your objectives. Done right, your dream home is yours for the taking!
