German mortgages and minimum downpayments

Good evening. There have been rumblings about the German mortgage market getting "liberalised" a bit, but does anyone know what that will mean in terms of the minimum downpayment required? I've always read that 20% is required as a minimum- or is that a myth? Bloody hell, I put down only 5% on my last house in the Cultural Cesspool (U.S.)!

Thanks

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20% is typical, at least in the Munich area. So long as house prices stay stable, as they have for many years, there is no incentive for the banks to take any risk, as they would otherwise do should they lend, the customer defaults, and they get a house worth 25% more than when they loaned 100% on it...

If you only have a 5% downpayment, surely it is better to rent. As YL6 says, house prices really aren't going anywhere in Germany (well, Munich at least) and this is the only way buying your house is beneficial over renting.

For example, to rent a 400k euro apartment in Munich you'd pay around 1000 euros a month (cold). Thats 12k a year.

If you had a 5% deposit for this house, you'd have a 395k euro loan. Lets say you get a 4% interest rate from the bank on that loan. In this case, you are paying 15800 euros per year just in interest.

This doesn't even consider the fact that interest rates are only going up, so you're going to be quite possibily worse off than this in the future. If house prices were rising, I would agree it makes sense because your captial would be rising as well, but this is not the case. Here is a link Johnny English posted in another thread. Since 1980 house prices have dropped over 20% in real terms, and only risen around 30% in total which if you were using it as an investment is very poor.

I own my own home and yes, we pay 3 times what we paid to rent an apartment. So, what do we get for that? Our own space. Our own bathrooms, 3 real bedrooms, and office a full basement for our bikes and other sporting equipment and junk, a brand new kitchen, access to the outside anytime we want, no elevators, no annoying neighbors to tell us that we can't do laundry, play music, drill on Sundays or at 3 am in the morning, my own garden that I can grow veggies in or lay out topless in, etc, etc, etc...yes, I think it's well worth it and I would not trade it for anything in the world right now. Oh yeah, in 20 years from now, when you guys are all still paying your rent, I won't be.

But you could have rented the exact same place you are in now and you'd be paying less and still have all those advantages you talk about. Even the new kitchen here in Germany is something that would probably happen in a rented place!

In 20 years you might have your house, but those that rented and saved the extra money that they would have given to the bank will have a big pile of cash instead!

I'm not against buying, but I think there is a time and a place for it, and getting a 95% or 100% loan does not seem to make financial sense to me, unless of course your house is going to gain a lot of value, like they did in Australia or the UK. I mean, in Australia if I had have got a 100% loan for a house 10 years ago I would be rolling in the cash right now!

I'm not financial expert though, and I would love someone who is to prove me wrong and explain to me why..

20 years! That's the whole point.

Calculate he amount of interest you're paying in 20 years time and compare it to paying rent for a few years in modest accommodation. Rent for a short period of time and invest the money you're saving so that when you do buy a house your downpayment can cover the majority of the price of the house. I'm from the camp that thinks paying interest is a complete waste of money. I realise it's rarely feasable to buy property without a mortgage of some sort but I think it's better to wait until you've accumulated enough capital to minimize interest payments as much as possible.

I've never lived in a house that wasn't paid off within 5 years.

You can get exactly the same by renting a house, and if the roof starts to leak it's the owner that pays and not you. If your work takes you elsewhere it's easier to move if you're renting, just as it is easier to move from rented accommodation than go crazy in the house you own if neighbours from hell buy the house next door.

Hutcho,

Good point and half correct. I once did a model on the financial benefits of buying a house and mate it all depends on the future which is unknown...i.e.

1. Interests on Savings vs Mortage Interest Rates
2. Capital Gains on your house compared to Shares and/or other investments.
3. Costs of Owning a house: structural rennovations etc.
4. Rent Inflation
5. Risk of Default on a house...no default on shares

So as you said it is not necessary as many Brits like to think always the best thing to buy your house/apartment but what it is always best to do is to Save...as long as you are saving whilst renting the liklihood is you aren't missing out.

But the final thing to say is that for many people they are shit savers so the great thing about a house it is forced saving albeit it with the penality of paying all that interest back to the bank.

What about guidelines regarding how expensive a pad should you buy given your income. I watched a NZ show recently that said the standard amount there is buy a property worth 3 times your annual gross income. Is there a similar rule of thumb for germany?

I think that's the crux of the matter, most people just can't save on their own.

Easily.
Munich is the richest city of the richest country in Europe. Plenty of jobs etc etc. Look at the exports - no.1 on the planet - bigger than the USA.
Compare the disposable income here with say Madrid. Now compare the property prices - you can do the same with most cities in Europe. Munich is way out of line.

finally interest rates are currently reasonably low - you can get a fixed rate for 10 years from now at 4.5% p.a.

What do you mean way out of line? You think they are too cheap and are going to go up? I find out prices in Munich to be incredibly expensive, however I find the rent here to be not too bad. Your point about interest rates is a good one though, but if you're going to get a 100% loan and pay it off in 30 years it might not help much, and even at 4.5% you're paying a lot more interest that it would cost to rent.

I mean compared to disposable income here in this city property prices are very low. Make the comparison with many cities in Europe - ffs muppets are buying in Bulgaria!!!??? I won't even go near comparisons of building standards here vs outside cos it's such a no brainer (suffice to say Munich KILLLLLLLS places like Dublin).

OK if u have a spreadsheet handy do a very basic calculation - use a 1% rental inflation assumption per year - that's ridiculously conservative - you're still killing over the 30 years vs renting. If you can't buy this then I give up. I wouldn't be giving out this info so easily had I not recently bought my own gaffe btw.

@Parnell,

Not true mate...I'm afraid as the property prices have gone silly in Spain and Madrid. I meet a coupe of Spanish tourist in Munich and they were telling me that there are now 50 year mortages in Spain as the income/price ratio is way out. Barcelona is also terrible...okay areas for an okay flat is around £150k to £200k (that's what I saw in the Estate Agents when I was there last).

Asset Prices are based on economical fundamentals and also on their previous price i.e. they are circular or better known prown to bubbles.

Unfortunately if you want to use house price investments like in the UK or now Spain or Italy...Germany isn't the best market in the world because the income/house price ratio is relatively high but their is no house price inflation...which means you pay the burden of all those interest payments...without the capital gains upside...

But this could change...

@Parnell,

Not sure if you have really looked but myself and my future wife disposable income is excellent whilst I could now with our savings go and get something in London in a middle class area (maybe not the best)...in Munich we are left to wonder how they can demand so much...in terms of price and deposits etc.

We are looking around Solln and 400k Euros is about the beginning benchmark for something relatively decent (subjective I know) that's £250k but the better stuff is around 500k Euros or ££300 aprox. With the silly deposit and stuff and the high transaction costs what we could now buy in the London what we have to save for in Munich...so as far as I see I couldn't say the prices are very low...

PS. We are first time buyers...

@ stanford
I'm not buying to resell - I'm buying because of the rental situation - long ass term the market will return to equilibrium. It's not just Spain and Italy, it's Ireland , it's Scandanavia (particularly Denmark) - it's more than half of Western Europe.

No house price inflation - uh ok ... u think people will still rent rather than buy when rents pump over 75% mortgage repayment rate ? Answer no - ergo house prices rocketing.

BTW I'm also first timer here and taking a massive risk but long term (critical point that) I think it makes sense.

I think the property market, depressed since unification, has stabilised. With Bavaria seeing continued population expansion, and growth in inward investment and infrastructure, I think the future looks bright for Munich. Also, changing living patterns (more people living on their own... although this will happen here later than, say, in London), and cheaper credit should mean a stronger market. I'm counting on prices rising anyway . Spread the word, and it'll happen!

If property could be seen as an investment here then that would change everything. Unfortunately at this point it's not and personally I'm not that optimistic.

uh congrats maing!

Long term we are all dead...I still consider myself an economist but in my adult life have learnt that thinking toorationally can mean you miss the boat or make wrong decisions... As I said above there is no right or wrong answer...it's a gamble like life buying a house.


Not sure that you are saying here...I mentioned before the future unknowns which implicitly or explicitly one takes a bet on when buying or not buying a house...

We for two have decided to hang a while since...we don't need the extra space...and are able to save at the moment...well I'm not but my girlfriend is!!! The secret is I pay the rent and the bills (stops me) wasting the money on crap and gives her more disposable income to save...!!!

Land is still cheap around Munich. Only 1.3M population, so the city has space in the suburbs, and I think that alone will keep any real house price inflation clipped.

Lots of people round where I live work in central Munich, train is pretty quick, and property is still dead cheap. If anything the rental market is getting worse, with more empty properties.

When we rented our place in late 2003 we were very lucky to get it. When it want back on the rental market last month it was much harder to shift. (but of course rented in the end).

So don't buy to invest round here.

No way, you haven't seen my house. I can pay the same amount maybe to rent my house but then I wouldn't be saving for anything. This way, I'm paying but, in 15 years, I won't be paying for a house or rent or anything and that is huge. Can you see me as a 75 year old retiree paying 3000 (or likely a lot more) for this house. I don't think so.


Then you've obviously never bought a house in Boston or Munich or you are independently wealthy. I'm just your average working girl.

I take it all back kitkat64. You look great for 60. I never thought you were a day over 55 in fact.

Fair call. If you can really pay a mortgage with the same repayments as rent then you've made the best decision. My point is that interest repayments on a big loan are more than rent in many cases in Munich.

Sounds like a great plan - better hope she doesn't dump you!

Five years' worth paid off in 41 minutes! This must be a record!

I think that is pretty great - but most young profis won't live outside cities and commute if they can avoid it. I'd certainly consider it if I had kids.

I would only be able to afford living outside the SBahn area, so its not an issue for me.

People do it all the time, even in Munich. It's just a matter of starting early, having a healthy income, saving and making smart investment decisions with your savings.

It is possible to get 100% of the purchase price if you really want to and your income is stable. The risks are obvious as property in some areas is not expected to hold it's value. To calculate what you could borrow use 40% of your monthly income as a benchmark for how much you could repay each month - this is what most banks assume you can afford.

Whereabouts in Germany are you Sun King?

@Rebecca,

Once in a while someone says you get can a mortgage on less than 20% deposit or 100% mortgage...when we looked they said around 10 to 15% since we earn well but I'm a contractor...so my question is which banks give 100%...

Like to know for future reference...

Well, I posted a while back that we were being evicted because of Eigenbedarf and we weighed the pros and cons of buying/renting. Renting is way cheaper. We have found a lovely farm house with 180 sq m and 10 rooms. No way could we buy that, the basic repayment rate would be at least 2,000 a month but renting we'll be paying about 1,200.

@Janx_Spirt,

That's what we assumed at the moment and it is flexibile so when any children come along we can always upsize...!!!

Bloodyhell that farm house sounds amazing (and cheap)...need any lodgers...

have to admit Janx spirit has a crazy deal there...

EDIT: kids 1st tho... like city life

@stanford

We spoke to a Baufinanzberater who explained how german mortgages are structured. In the end we went for a large loan from the ING DIBA on the basis that rates are low and we fixed this rate for 15 years.

A point missed in all the above threads IMO is a matter of future career. If you have decided to stay here forever or at least 15 years as kitkat mentions then definitely renting is wasting your money. But just imagine you either don't want to stay here(Munich or germany) for a long time or you are offered a better job somewhere else or... then by buying you have minimized your DOF(degrees of freedoam) badly.
(Of course there are other life event minimizing DOF such as marriage, having kids, ... beyond the scope of this talk )

You may say i sell the house but well if this is done in only a few years after you bought it i don't see any profit for you.

Wow...sounds great...so ING DIBA and fixed rate for 15 years...

Will write that one down!!

With three children and a wife I have all the lodgers I can use The house is great and I'll admit "wir haben schwein gehabt". Complete with 2 German Kachelöfen, central heating, wooden floors and a herd of 48 cows...(that last bit may not be true)

It was a difficult decision, we needed/wanted to stay near where we live because of school etc but buying there at the moment would be just plain silly; they are thinking of using the Oberpfaffenhofen airport for commercial purposes and if they do (and they will according to a German lawyer friend), house prices will fall.

It would be worth it just for the cows.

Not sure why you felt the need to qualify your source. "Trust me, I'm a lawyer" - now that is comforting.

Well, exactly. The dubious nature of the informant suggested the need of such a disclaimer

Wealth from past: It would work but things such as divorce's get in the way
Munich high prices: Not compared to international well off cities see Zurich.
Prospects for the future1: 20 years ago the french did not buy (ownership around 40% like germany) now 60% prices have risen.
PFTF2: Munich has 40% of IT in Germany it is a hot house. New people coming in.
PFTF3: Tried to buy a flat in munich recently, they all get sold asap.

The long term guide is(Harvard University method):
6 months cash (ie 6 months salary)
10-20% commodities
30-35% shares (inc pension)
20% bonds
30-35% property

Having said that all are saying a drop in prop prices coming in US/Spain. It does lilke the bubble seen in the 90's in the UK. I would steer clear of Spain myself.

Who knows, economics is not a science for sure, there is no real prediction possible, only guidelines.

If you are thinking of buying a house in Germany it's a good idea to start a Bausparplan. These are government sponsored saving schemes with above average interest which enable you to save for a deposit (typically 5-7 years) and guarantee a loan at a reduced rate. Even though I own property, I use these plans to re-mortgage. I'm currently saving in a plan with 3% annual interest on savings and a guaranteed loan of up to 15 times the accumulated savings after 7 years at a guaranteed, fixed interest rate of 3.25%... The accumulated savings will be used to part pay-off an existing mortgage, the remainder going into re-mortgage at this preferred rate.

@Stanford - we also financed with ING DBa - we are trying to knock down the principle on the loan with special payments every year (from bonuses, etc) so that will help us pay it off faster. We also did not have anything near the 20% down payment for our house. The bottom line is that somewhere between 15 and 20 years our house will be paid off (depending on the special payments made each year) which means that when I am between 55 and 60, I will no longer be paying to put a roof over my head (well, except for necessary monthly costs). I don't miss living in the city at all...I can go anytime I want (I'm here every day, right?)

It took me a while to really understand how different german mortgages are from Uk mortgages, particularly the 1-5% Tilgung, the length of time you can fix the interest rate and the way you can make these extra payments. It's even possible to have the loan in two parts with some of it fixed for longer and some on a cheaper rate for a shorter duration.

Rebecca, exactly. We actually have 2 loans with varying lengths and different interest rates. I'm not exactly sure how it works (it was as in German and my boyfriend really researched the best possible combination for us and our future in mind).

Glad to hear I'm not the only one who had difficulty grasping the meaning of Tilgung.

The other thing that surprised me is that if you do sell during the term of the loan you can usually keep the loan going to finance another property or even sell it on to the buyer if they meet the bank's requirements.
If interest rates go up, and yours is fixed, then these become attractive options.

Also worth remembering is that even when the bank finance the entire house you will still need some savings to cover the costs of buying which can be up to 10% of the price once you have paid the Notar, the Makler, the Grundwerbestueuer...

Wow, this post has really taken off- I should have checked it earlier! Thanks for all the comments.

To answer a few questions/comments I saw about my original post:

1. I agree that it probably wouldn't be profitable to buy with only a 5% deposit in Germany, but I was referring to the last house I bought (and sold when I left) in the Cultural Cesspool (The U.S.), where it worked out really well because there was some decent price appreciation, lower transaction costs, and the heavenly American tradition of allowing you to write off all your mortgage interest against your taxable income...one of the few things I miss about living in the U.S.! If I bought in Germany I'd put down more.

2. I'm not in Germany yet actually; I'm still trapped in the Third World (Buckinghamshire, UK) for now but trying hard to escape.

One thing that's clear...the choice of whether to buy or rent is MUCH harder in the Fatherland than it is in the U.S. for example. If I get close to that point, I'll definitely have to do some extensive financial modeling to make a decision! Who knows, maybe I'll come to the conclusion that it would be better to rent something modest in Germany and buy an investment property to rent out somewhere else...I don't know. First I have to get to Germany and save more money though so I have a long time to decide!

Oh man, what an excellent idea...

Why is it such an issue? Fact: you need a decent place to live in an area that appeals to you and at an affordable price for your income. You can rent, no problem at all. Over here it generally works out cheaper than buying. No need for any extensive financial modeling to make a decision! Its the engish (and americans) who are obsessed with being "property owners". Doesnt apply here.