Four secret tips to help you save money on your German mortgage

Would you like to own your own property in Germany? Many expats share the same dream, but most people will need a mortgage to finance a property purchase. Kerstin Brunner, a financial coach and mortgage advisor, shares four secret tips that can help you save money on your mortgage in Germany. 

On average, 70 percent of the population of Europe lives in a home they own. By comparison, Germany trails behind the rest of the continent, with just 50 percent of properties being owner-occupied. However, with Germany boasting a high standard of living and a relatively stable property market, it’s not surprising that so many internationals who relocate to the federal republic are highly interested in purchasing their own property. 

But with rising interest rates making the prospect of a property purchase via mortgage financing more expensive, many people are looking for solutions that will help them save money on their mortgage repayments. 

If you are considering purchasing a property in Germany, here are four top tips that could help you save money on your mortgage. 

1. Consider the connection between your equity and the loan value

When you are looking for a mortgage, two crucial topics come into the calculation. The first is your equity (Eigenkapital) - the money you bring from your side, which will be used as a downpayment on your mortgage. The second is the loan value (Beleihungswert), which is the total amount the bank (or any other lender) gives you in your mortgage. 

These two figures are put together to come up with something called the loan to value ratio (LTV), which is used by lenders to calculate the ratio of the loan compared to the total value of the property. Simply put, the greater the loan to value ratio, the higher the risk is for the lender, as they will be less likely to recoup the money if the borrower defaults on payments. 

For that reason, properties that are purchased with a higher proportion of equity have a lower LTV and therefore benefit from a lower interest rate, which will save the buyer money in the long term. Therefore, the more equity you can save up before starting your property purchase process, the more money you will save in the long term. 

It’s also worth noting that in most cases you will need to exhaust your equity first before the bank pays out. This means that most acquisition costs like property transfer taxes and notary fees need to be financed from your own equity, not the mortgage. 

2. Overpayments usually cost you extra and most people don’t use them

In Germany, you need to determine with your lender upfront whether they will let you make overpayments on your mortgage (known as “special payments” or Sonderzahlung in German). As the name suggests, overpayments are when - on top of your regular repayments - you make extra payments to your lender, with the aim of paying off your mortgage more quickly and reducing the overall amount of interest you pay. 

Many people opt for a lender that allows overpayments of up to 5 to 10 percent of the mortgage value each year, with the aim of saving money. However, nine out of 10 people actually don’t end up making any repayments at all. This often means they are paying for something they don’t use. 

This is because - depending on the bank - the option of overpayments might actually come with an additional cost in the form of a higher interest rate. Standardly, banks charge somewhere around 0,1 to 0,2 percentage points of additional interest for a loan deal that allows overpayments. 

It’s therefore important to carefully compare offers that come with and without the overpayment option and consider how this affects the overall cost - and also whether you would actually be able to afford to overpay on your mortgage. 

3. Fixing your interest rate for a longer time might end up costing you more

Between 2016 and 2022, mortgage interest rates in Germany were low, sometimes even less than 1 percent. People who took out mortgages during this time generally wanted to fix their deals for as long as possible, and many opted for a mortgage duration of more than 20 years. 

However, it is worth noting - especially now with mortgage interest rates in flux - that in general the longer the duration of your fixed interest rate, the higher it is. For example, a 15-year fixed rate is on average 0,2 percentage points higher than a 10-year fixed rate, while a 30-year fixed rate is 0,8 percentage points higher. 

When taking out a mortgage, you’ll need to consider how long you want to fix your interest rate for. It’s a tricky question and depends on what you think will happen to interest rates in the coming years. If you expect the interest rate to increase, it might be better to lock in the lower rate for a longer duration. If you think interest rates might decrease, it might be better to go for a shorter duration so you are able to switch when rates come down. 

Unfortunately, there’s no easy answer to this question, but it is worth carefully comparing the deals you are offered, and the durations. Depending on what happens with interest rates, locking in a long duration fixed rate mortgage now could prevent you from switching to cheap deals in the future, should interest rates come down again. Over the duration of the mortgage, it could end up costing you more. 

However, it’s also worth noting that - no matter how long your interest rate is fixed for - you can usually switch after 10 years and six months. After this period has elapsed, you can ask your current provider (or any other provider) for better conditions, for example if the interest rate has gone down.

4. You can use your equity to purchase some items and save on land transfer taxes

Land transfer taxes (Grunderwerbsteuer) are payable on all property transactions in Germany. The rate changes depending on the federal state where the property is located, but is somewhere between 3,5% and 6,5% of the purchase price. For a 500.000-euro house in Berlin (where the tax rate is 6%) that’s a bill of 30.000 euros. 

One clever way you can reduce your land transfer tax bill is to arrange with the seller to purchase some items from the house with your own equity. This is possible for moveable or semi-fixed elements of the property, for instance the kitchen or other fittings. You might be able to arrange to pay the seller directly for these items and therefore reduce the overall purchase price of the property - reducing your land transfer tax bill.

If we take the example of the 500.000-euro house in Berlin, let’s say you offer to buy the owner’s kitchen and some other fittings for 35.000 euros, which you pay with your own equity (not with a mortgage). This reduces the total purchase price to 465.000 euros and your land transfer tax bill to 27.900 euros - a saving of 2.100 euros. 

If you do make an arrangement like this, keep in mind that there are additional costs involved in a property purchase like real estate agent fees, notary fees, land registration fees and surveys that have to be paid for with your own equity as well; they cannot be covered by the mortgage. 

Save money on your mortgage

Armed with these four tips, you should be able to go into your property purchase with a good idea of what to keep an eye on to save as much money as you can on your mortgage. 

If you are looking for support before starting with a property purchase process, get in touch with Kerstin Brunner. As an experienced financial coach and mortgage advisor, she is able to guide expats through the property purchase experience to make it smoother and quicker. Visit her website, or listen to her appearance on the Germany Experience podcast to find out more about purchasing a property in Germany.