German mortgage rates for property purchase

The monthly rate is made up of 2 components

• Interest Payment (the cost of the loan)
• Principal Payment (Decreasing amount of the debt)

The larger the down payment, the lower the interest rate on the loan

The higher the principal payment, the faster the mortgage will pay down

You can define the amounts, 2-5%, of Principal Amount that is paid off each year

The interest rate of the mortgage is impacted by the following factors:

• Down Payment – a higher down payment will typically result in a lower interest rate.
• SCHUFA score – a higher credit score will typically result in a lower interest rate.
• Borrowing Amount – a higher borrowing amount will typically result in a higher interest rate.
• Disposable Income – a higher household budget will typically result in a lower interest rate.
• Fixed Rate Period – a longer fixed interest rate period, for example 10 years vs. 5 years, will result in a higher interest rate.
• Loan to Value Ratio – a lower borrowing amount compared to the price of the property will result in a more favorable interest rate.

When you sell the property in Germany before 10 years, you will need to pay a penalty fee which is the cumulative interest payments due for the rest of the mortgage. For example, if the rate period is fixed for 10 years and you sell after 5 years of ownership, you will owe the bank the remaining interest payments due for the fixed rate period. After 10 years, it is not necessary to pay any penalty fees.

It is possible to pay back the loan faster than the schedule as laid out at the beginning of the mortgage. These are the options available to you:

• Unscheduled Voluntary Payment: pay back 5-7% of the initial loan at once.
• Change the Scheduled Principal Payment: Some banks allow you to change the principal payment up to 5 times during the runtime of the fixed period of the mortgage.
• Pay off the Loan:
  - if the loan is fixed for up to 10 years, then you must pay a penalty fee. The penalty fee equals the amount of remaining interest payments.
  - if the loan is fixed for longer than 10 years, you can opt out with paying any penalty fee.

• German law allows you to cancel your mortgage without penalty fee after 10 years.
• Most people are unaware of this law.
• You are able to refinance with a new and cheaper bank.
• You are able to opt out of a mortgage before 10 years but you must pay a penalty fee.

• A 10-year fixed mortgage will result in a lower interest rate but higher interest rate risk for after the fixed rate period.
• The 20-year mortgage will have a higher interest rate but lower interest rate risk.

• Continue mortgage with Existing Bank
• Switch and refinance with new bank
• Payoff outstanding debt
• Increase the loan amount

The monthly rate will increase. Depending on how far interest rates have increased, the monthly rate might increase substantially. A higher fixed rate period will give you more time with the initial interest rate.

The general market situation is the strongest factor that determines your interest rate. In 2018, actors that will influence the market in are: the ECB, the key interest rate and the US Federal Reserve (Fed). All favor a longer-lasting upward trend.

The ECB

The ECB’s main role is to ensure price stability in the EU. To do so, the ECB uses two tools: the key interest rate and the bond purchase program.

Current ECB policy

Until the inflation rate reaches 2%, the ECB will keep the key interest rate low and buy up government bonds. In June 2017, the ECB excluded further cuts in the key interest rate for the near future. The ECB’s bond-buying program will continue until the end of 2018.

Current ECB monetary policy clearly signals that interest rates will not fall back to 2016 levels.

The key interest rate

The key interest rate directly impacts mortgage rates. First, banks refinance mortgage lending by selling mortgage bonds. Second, the interest rate of these bonds depends directly on government bond rates.

Germany’s interest rates

With the German economy doing so well, the demand for German government bonds is currently high. As a result, their interest rates remain low. In turn, that drives low interest rates in banks across the country.

The Fed

In 2017, the Fed raised interest rates again. The Fed’s move makes US investments more attractive, so investors are moving from the euro area into the dollar area. This puts the ECB under pressure to bring the key interest rate up, but EU data does not currently favor this decision.

Potential increase to 1.5%

Interest rates in 2018 will likely increase moderately by 0.5%. That may bring interest rates to a maximum of 1.5% in 2018.

What does that mean for buyers?

The sample calculation below shows what these 0.5 percentage points mean in terms of euros. The calculation uses a property worth €300,000. The buyer needs €150,000 in financing and the initial repayment is 2%.

The monthly rate of €373 will increase to €473. Despite a rise in interest rates, the remaining debt after 10 years is even lower by almost €1,000. The higher borrowing rate shows a bigger difference in total interest costs of almost €7,000.