Residential mortgage market in Germany

The German mortgage market has a distinguished position within the European Union (EU). Due to its focus on risk safety and restricted lending practices, fixed interest rates with long-term duration, loan value instead of market value, and low loan-to-value (LTV) ratio provide a secure basis for lenders and mortgagers alike.

Enduring and stable framework
To date, financial products for private households provide little ground for financial speculation and contribute to keep the house prices in Germany rather stable. Nonetheless, these precautions also prevent lower-income households from entering homeownership. This is one reason for the rather low homeownership rate compared by international standards. Thus, the German mortgage and housing market provide an enduring and stable framework for a tenant society.

Find below an overview of the most common types of mortgages in Germany:

Fixed-rate Mortgage
The most common and secure type of mortgage in Germany is the fixed-rate mortgage. The interest rate is contractually predetermined for the entire term of the loan agreement, usually 15, 20, or 30 years. With more maturity the proportion of principal payments will increase but the amount of monthly repayment will remain the same throughout the whole contract period. Although this type of mortgage provides for high financial predictability and protection from increasing interest rates, the home owner might not be able to capitalize on positive market developments.

Adjustable-rate Mortgage
The adjustable-rate mortgage (ARM) usually offers a lower initial rate of interest than fixed-rate loans. Contrary to the fixed-rate mortgage the interest rate follows a base interest rate, typically adjusted every three months. Essentially, the base interest rate is determined by the Euribor (Euro Interbank Offered Rate), which indicates the interest rates major European banks offer each other for short-term loans. The long term exposure to financial markets makes the adjustable-rate mortgage a smart investment if interest rates fall. However, a further decrease in central bank interest rates seems unlikely after the ECB has drawn almost every monetary instrument available to provide for low interest rates.

Building Savings Contract
The chief advantages of using a building savings contract instead of a traditional loan are government subsidization (“Wohn-Riester”) and tax incentives. The building savings contract allows potential home-buyers to save money with attractive interest rates in advance and subsequently borrow the necessary amount to finance a property acquisition under equally favorable conditions. Although the interest rates for both saving and lending are generally low they are predetermined by law. In the current environment of low interest rates the incentives for building saving contracts have mitigated. Furthermore, this type of property financing might trigger additional transaction costs and should hence be carefully considered.

Mortgage combination
Many new homeowners choose a combination of these types of mortgage loan contracts. By adjusting mortgages to the individual needs of clients, banks ensure that young families may buy their own house even though their initial income would not be sufficient to repay all their debt. For instance the initial interest rate may be significantly lower than the final rate and a contractual option to extend the maturity may be included. The competition between German banks is huge and comparing the broad variety of mortgage options the market offers is therefore highly recommended.