Bavaria and the real estate bubble

260 posts in this topic

 

I don't have a German mortgage so I am probably not best positioned to comment however I know they are not like a UK mortgage where the debt and the principle is paid off in a term of 15, 20 or 25 years. I am aware that you can choose to pay off more but how many people are actually disciplined enough to do that if it is not structured that way in the first place?

 

Not sure what you mean there...

 

You can set the capital repayment (Tilgung) to anything you want when you arrange the mortgage.

 

Mortgage repayments are arranged on of two ways:

 

1. You agree with the bank how much you can afford per month, e.g. €1000. The monthly interest (e.g. €400) is then deducted from the €1000 & the amount left over (€600) is capital repayment at whatever % that works out to be.

 

2. You agree with the bank how much capital repayment you want to make (e.g. 2%). The capital repayment (e.g. 2% = €300) is then added to the monthly interest (e.g. €400) to give you your rate of €700.

 

You can also arrange to make "Sondertilgungen" which is normally a % of the debt.

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Banks are not stupid ( well some are ) but german banks are so conservative and still offer less than 2% interest for 10 years. They wouldnt do that if inflation was on the way.

 

5 years ago i got offered 3.85% for 5 years or 5.5% for 10. My financial conservative broker wanted me to go for 10yrs due to his conservative nature and was not going to profit from signing me up for this longer period.

 

Last month i got offered 1.3% or 1.9% for 5 and 10 years. Until greece etc sort them selves out this will probably continue. Im guessing for 40 years or so.

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I don't have a German mortgage so I am probably not best positioned to comment however I know they are not like a UK mortgage where the debt and the principle is paid off in a term of 15, 20 or 25 years. I am aware that you can choose to pay off more but how many people are actually disciplined enough to do that if it is not structured that way in the first place?

 

 

 

You can set the capital repayment (Tilgung) to anything you want when you arrange the mortgage.

 

Exactly, and choosing to set your Tilgung higher will even lower your interest rate (as the mean outstanding risk for the bank is lower with higher rate of Tilgung)

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Arrange is the key word here Eric. If you set the capital repayment to 2% how many years will it take to repay the loan? In the UK you do not set a capital repayment, instead you set a term i.e. number of years in which you want the whole mortgage paid off, that to me seems much more straight forward. If someone can demonstrate that paying a 2 or 3% tilgung will pay off your mortgage in 20 years then I am clearly confused? :)

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Well when you set the Tilgung to 2% you can see the date when the debt is paid off. If you want it to be sooner, raise the Tilgung or vice versa.

 

The banks will have an option where you can specify the completion date of the loan & it will work things out backwards.

 

Edit: Whether a 2 or 3% Tilgung will pay off the mortgage in 20 years also depends on the interest rate.

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However, our former landlord who has massive rental property in Stuttgart told us to wait 10 years when the old people like himself start to die. There will be a glut on the market and prices will drop. His theory is that the next generation doesn't want the hassle of property ownership and/or inheriting their parents homes and people move around more now.

I don't follow this logic? He may die in 10 years time but new humans have been born every year since his birth. There isn't actually a "next generation" on a global/national scale (just from his viewpoint) - there are people aged from 10 month to 100 years old in this country. Don't want the hassle of property ownership?? Then who the feck has been buying all this stuff to make the prices jump in the last 5 years then....yup you guessed....the "next generation" of future landlords of course.

 

 

Banks are not stupid ( well some are ) but german banks are so conservative and still offer less than 2% interest for 10 years. They wouldnt do that if inflation was on the way.

Inflation on the way?? I assume you mean "higher interest rates" 'cos inflation (price rises) hold no fear for the banks. If they lend you €100k and INFLATION makes the prices increase so the house is worth €150k they don't have much to worry about. But yeah - the issue with interest rates is NOT just housing - high interest rates cripple business so the government really don't want to see that...too expensive for votes.

 

 

Edit: Whether a 2 or 3% Tilgung will pay off the mortgage in 20 years also depends on the interest rate.

Not brilliantly phrased.

 

You could have an interest rate of 0% and your 2% Tilgung is only gonna knock off 2%. Doesn't matter what the interest rate is - 2% a year is still 2% a year off the Capital. The interest you pay meanwhile might be 1% or 10%. If you could be bothered to do the maths you could calculate EXACTLY how much 2% per year knocks off the lump sum (i.e.

2% off 100%, then 2% off 98% and so on).

 

What you are probably trying to say is that if you have a FIXED payment per month in mind (say €2.000) then for sure a low % interest rate leaves you room to pay more Tilgung and vice-versa.

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Quick google and this is handy little tool:

 

http://www.moneysavi...lculator#result

 

Obviously doesn't matter that we have ££££ as the maths is the same. But you can see on a €100k mortgage (had to enter 0.001% rate to make it work), that by overpaying €420 a month which is €5040 a year you get done by the 20 year mark. So on your €100k mortgage that would be I think a 5% Tilgung.

 

With that in mind a 2% or 3% tilgung is NEVER gonna pay off your mortgage in 20 years.

 

But in "the real world" if you decide you can afford €1.000 a month then at the moment you would pay only €2.000 a year in interest and €10.000 gets knocked off the capital. If rates fly up to 5% then it is €5.000 in interest and only €7.000 off the debt per annum.

 

post-544-14255527243245_thumb.png

 

post-544-14255527350746.png

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Not brilliantly phrased.You could have an interest rate of 0% and your 2% Tilgung is only gonna knock off 2%. Doesn't matter what the interest rate is - 2% a year is still 2% a year off the Capital. The interest you pay meanwhile might be 1% or 10%. If you could be bothered to do the maths you could calculate EXACTLY how much 2% per year knocks off the lump sum (i.e.2% off 100%, then 2% off 98% and so on).What you are probably trying to say is that if you have a FIXED payment per month in mind (say €2.000) then for sure a low % interest rate leaves you room to pay more Tilgung and vice-versa.

 

Quite! (English is my first language, honest). :D

 

Btw, I did bother doing the maths. :D

 

I'll do a few quick examples:

 

1. €100k house, 2% Tilgung, 2% interest = a rate of 333.33€ which takes 34 years & 8 months to pay off.

 

2. €100k house, 2% Tilgung, 5% interest = a rate of 583.33€ which takes 25 years & 1 month to pay off.

 

3. €100k house, 5% Tilgung, 2% interest = a rate of 583.33€ which takes 17 years to pay off.

 

4. €100k house, 5% Tilgung, 5% interest = a rate of 833.33€ which takes 14 years to pay off.

 

The key of course is that the 2% that you set at the beginning is only actually 2% for the first monthly payment. It rises every month after that, with the monthly interest amount going down every month. However the higher interest rate means a higher initial monthly payment which translates to a higher monthly Tilgung. Phew.

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What is interesting actually, in this time of ultra low interest rates is that if you take out a €100k loan with 1% interest & pay only 1% Tilgung you would still owe over €58k after 35 years.

 

Admittedly the monthly rate would only be €167 & the property should have increased in value but still...

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3. €100k house, 5% Tilgung, 2% interest = a rate of 583.33€ which takes 17 years to pay off.

That is pretty much the "real world" example as it ain't going much below 2%. (obviously yes we are all getting better than that, but whatever you are now getting will be the low).

 

Whic proves that 2% or 3% is NOT gonna get the job done. You need 5% Tilgung to get sorted in about 20 years.

 

But...even if for some reason you *only* manage to pay off 50% of the debt you are still better off than the schmucks renting for 20 years.

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A €100,000 loan might buy you a house around Munich if you have a €400,000 deposit, but otherwise those figures need to be quadrupled at least to be relevant. Rent in contrast will be less than half, so renters who invest the difference in the stock market for example will be better off than the schmucks giving all their money to the bank for a quarter of a century or longer.

 

post-977-14255543039069.png

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A €100,000 loan might buy you a house around Munich if you have a €400,000 deposit, but otherwise those figures need to be quadrupled to be relevant. Rent in contrast will be less than half, so renters will be better off than the schmucks giving all their money to the bank.

 

1. €500k house, 2% Tilgung, 2% interest = a rate of 1666.67€ which takes 34 years & 8 months to pay off.

 

2. €500k house, 2% Tilgung, 5% interest = a rate of 2916.67€ which takes 25 years & 1 month to pay off.

 

3. €500k house, 5% Tilgung, 2% interest = a rate of 2916.67€ which takes 17 years to pay off.

 

4. €500k house, 5% Tilgung, 5% interest = a rate of 4166.67€ which takes 14 years to pay off.

 

More realistic, but also scarier numbers.

 

The timeframes remain the same however.

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He may die in 10 years time but new humans have been born every year since his birth.

Not only that, someone is going to inherit the majority of these homes. My in-laws have inherited 3 and simply rent them out, one of them to us.

 

So homes that used to be occupied by the owners, are now being rented out, rather than overflooding the market with houses for sale.

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A €100,000 loan might buy you a house around Munich if you have a €400,000 deposit, but otherwise those figures need to be quadrupled at least to be relevant. Rent in contrast will be less than half, so renters who invest the difference in the stock market for example will be better off than the schmucks giving all their money to the bank for a quarter of a century or longer.post-977-14255543039069.png

 

I've always maintained that if the interest you are paying is more than rent would be then it's not worth buying.

 

1. €500k house, 2% Tilgung, 2% interest = a rate of 1666.67€ of which initially 833.33€ would be interest

 

2. €500k house, 2% Tilgung, 5% interest = a rate of 2916.67€ of which initially 2083.33€ would be interest

 

3. €500k house, 5% Tilgung, 2% interest = a rate of 2916.67€ of which initially 833.33€ would be interest

 

4. €500k house, 5% Tilgung, 5% interest = a rate of 4166.67€ of which initially 2083.33€ would be interest

 

I think you would struggle to rent a €500k house for 833.33€ a month.

 

I agree that in the days of 5% interest it made sense to rent. Today with 1-2% interest it doesn't, unless the property prices are unrealistically inflated and are likely to drop sharply with an interest rate rise.

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The interest rates are virtually guaranteed to rise though. They may be 1% now but in 5, 10, 15, 20 years' time they will be (much) higher. 5% is roughly the long-term norm, and as a mortgage lasts 25 years on average, it doesn't make sense to only consider the current interest rates.

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A €100,000 loan might buy you a house around Munich if you have a €400,000 deposit, but otherwise those figures need to be quadrupled at least to be relevant.

You are being silly. I put €100k in so that we can see the %%% easily for the maths. I wasn't pretending you can buy anything for €100k worth living in around here.

 

 

Rent in contrast will be less than half, so renters who invest the difference in the stock market for example will be better off than the schmucks giving all their money to the bank for a quarter of a century or longer.

Less than half? Says who? Again plucking numbers from nowhere. At 2% or less interest rates that is the only DEAD money on your monthly mortgage - all the rest goes back in your sweaty pocket for later. See example here:

 

 

3. €500k house, 5% Tilgung, 2% interest = a rate of 2916.67€ which takes 17 years to pay off.

You may be paying €35.000 per annum on those numbers BUT only €10.000 is DEAD money (the interest payments) - the other €25.000 is going straight back into your pocket.

 

So you are trying to tell me you can rent a €500.000 house in Munich for €5.000 per annum??? (half the cost of the bloke with the mortgage) as you seem to be ignoring the €25.000 per annnum getting knocked off the mortgage.

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The interest rates are virtually guaranteed to rise though. They may be 1% now but in 5, 10, 15, 20 years' time they will be (much) higher.

 

Buy now with a low fixed long term rate & pay off as much capital as possible during that period.

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I've always maintained that if the interest you are paying is more than rent would be then it's not worth buying.

not just the interest: interest+upkeep+property tax, etc.

 

My in-laws have put close to € 100,000 into our house (new roof, drainage pipe, windows, heating, floors, etc.) since we moved in there in 1998.

 

We live in a small Bavarian town, where housing is inexpensive (plus they haven't raised our already low rent in all of that time), so I have only paid them slightly more than € 100,000 in rent, so far.

 

PS: If I had it my way, we'd sell the houses that we eventually inherit (except the one we live in), but my wife wants to keep renting them out. As long as she takes care of all the hassles that go with that... go for it.

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