Purchasing property without a mortgage: What you need to take care of

When you purchase a property with your own equity (that is, without receiving a loan from the bank), you not only have to rely on yourself for financing, but also for a lot of other parts of the process, which the bank would usually take care of. Kerstin Brunner explains what's at stake. 

It may not be an option for everyone, but for the small percentage of people who want to buy a property in Germany without a mortgage, the purchase process throws up a lot of questions. 

Simply put, when you purchase a property with a mortgage (loan) from a bank or other lender, there is a lot going on behind the scenes to ensure that the purchase makes financial sense for you. When you finance the purchase entirely yourself, you also take responsibility for these other parts of the process. 

It's therefore important to understand what's going on in the background during a "regular" property purchase with a bank's involvement, so you know what to expect when you go it alone. 

Financial freedom comes with hidden risk

First things first, let's talk a bit about financial freedom. Financial freedom is a desirable state that most people aspire to. The idea is to be free to make your own financial decisions and not be bound to others. At the same time, however, this independence also comes with risk, because you have to function as your own safety net. 

Let's take the example of purchasing property. One thing that motivates many people to purchase a property without a mortgage (if they are able to do so) is to achieve financial freedom and not be tied to loan repayments to a bank. However, in this example, the bank also provides an important backup. They conduct a number of checks to ensure that you:

1. Can afford to purchase a property, taking into account your other outgoings
2. Are looking to purchase a property at a fair and reasonable price

When you purchase a property without a bank's involvement, you are achieving independence, but you also have to take control of these aspects yourself, so you don't end up making a risky financial decision and potentially jeopardising the safety of your money. Let's take a look at these aspects in a little more detail. 

Client checks and property checks

If someone wants to obtain a mortgage from a bank, two processes start behind the scenes to work out whether the person and the property are a sound (i.e. not too risky) investment. In a nutshell, the bank wants to work out whether you can afford to own a property, and whether the property you want to purchase is being sold at the right price. 

The client check: Can you afford a property? 

The first process is the client check. The bank will want to know a lot of information about the person applying for the loan: their family and professional background, whether they are single or married, whether they have children, whether they are employed or self-employed, and key details about their income, savings and spending habits. 

All of that information determines whether or not the person is offered a mortgage. It also determines the conditions that that mortgage comes with, such as the total loan amount and the annual interest rate. 

If you are purchasing a property without a mortgage, the good news is that you won't have to go through this process with a bank or other lender. However, it is strongly advised that you do still consider these factors to work out whether the purchase is actually affordable for you. 

You might not have monthly mortgage payments to worry about, but there are other costs associated with owning a home that you need to think about. If you are draining your savings to pay for the property outright, will that give you enough to fund future repairs to the property? If you have been dipping into your savings up until now to cover your living expenses, how will you manage without them? Will the property come with larger utility bills, and will you be able to finance them from your salary? 

The property check: Is the property being sold at the right price?

Before the bank will lend someone money for a mortgage, they will also want to gather a lot of information about the property itself. This property check is important because the bank (as a risk-averse lender) will want to know if the property is worth buying, and especially if the sale price is right, considering the property's location, size and condition. 

They will also consider whether any binding regulations are involved, such as right of residence or life tenancy, or if there are any outstanding mortgages on the property. The bank always follows a low-risk approach to make sure that, if something goes wrong, they will get back the money they loaned. 

When you are acting as your own bank purchasing a property outright, you should also adopt a similar risk-averse approach. Equity capital enables liberty, but it comes with the personal responsibility to make an appropriate property check. The most important point is to check the value of the object and the price you pay for it. There might be a gap. Even if you've totally fallen in love with the property, try to think objectively and rationally instead of paying fantasy prices. Lower your risk as the bank would!

Consider the admin the bank takes care of

Finally, before proceeding with purchasing a property without the involvement of a bank or lender, it’s worth considering the sheer scale of the administration that the bank takes care of. As a cash buyer, you’ll be personally responsible for this, and so you will need to understand and check all the documents, and interact with all people who are involved in the process.

There are many people involved in the property purchase process. Some of them are the real estate agent, the landlord, the notary and perhaps the surveyor. Normally a person from the bank is involved if you have a mortgage, but if you are purchasing a property with equity money, you don't need the bank.

Keep in mind that not everyone offers their services in English and that you might need to be fluent in German to interact with all of these people.

One major part most people struggle with is the paperwork. There are so many documents involved in the process and normally they are all written in German. It can be very overwhelming and frustrating to go through the whole process by yourself, due to the language barrier. Documents relating to the property can be especially challenging, as can the notary contract.

The sheer scale of the documents is extremely challenging. Many people get frustrated because they can’t understand everything in the German documents, and it is too complex to understand the relations between all the different documents.

As you can see, there is a lot involved in purchasing a property in Germany. Whether you need a mortgage from the bank or not, you may wish to have a teammate on your side supporting you in your personal property purchase. If this is the case, don't hesitate to contact Kerstin Brunner. She has years of experience supporting internationals from all around the world in the property purchase process.