The 11 most common Mortgage Mistakes
Are you looking to buy a property in Germany? If so, you definitely want to avoid these 11 common mortgage mistakes. 😱
- In Germany, it is pretty important to have enough equity as you need to pay the additional purchasing costs in cash.
- You can compare as many mortgage offers as you want, but if you don’t have enough money for reserves, you can’t afford a property.
- Ignoring commitment interest can result in unexpected fees and potentially even rejection of the mortgage application.
- There are many different support programs for families with children, for energy-efficient renovations, and for people with disabilities.
- Protect yourself against emergencies with household insurance, term life insurance, and disability insurance.
Introduction: Should you invest in real estate right now?
Real estate financing is a crucial aspect of investing in property in Germany. The process of obtaining a mortgage can be complicated, and there are many common mistakes that can be made. However, before we delve into the 11 most common mistakes, it’s important to consider whether investing in real estate in Germany is wise.
The German real estate market has been consistently strong in recent years, with rising prices and high demand for rental properties. Additionally, Germany’s stable economy and political environment make it an attractive location for investment. However, it’s essential to carefully weigh the risks and benefits of investing in real estate before making any decisions.
One important factor to consider is the current state of the market. While the German real estate market has seen significant growth in recent years, there are concerns that prices may be reaching a peak. Additionally, the COVID-19 pandemic has created economic uncertainty and may impact the real estate market in the future.
Ultimately, the decision to invest in real estate should be based on a careful analysis of market trends, financial considerations, and personal goals. With that in mind, let’s explore the 11 most common mortgage mistakes to avoid when investing in real estate in Germany.
Mistake #1: Not Having Enough Equity
It’s very difficult to invest in real estate if you don’t have enough cash for a down payment – 10 to 20% is ideal, although you don’t necessarily have to invest all the money in the property itself. But the higher the down payment, the better the interest rate we are offered.
A low equity ratio can lead to higher interest rates, higher monthly payments, and even mortgage application rejection. It is important to carefully check how much equity you have available before applying for a mortgage.
Mistake #2: Forgetting Additional Purchasing Costs
Another common mortgage mistake is forgetting the additional costs associated with buying a property. This is why we need cash because the costs of buying a house in Germany can be quite high. They are incurred in three different areas.
- Firstly, 2% for the notary and the land registry – this is a mandatory requirement.
- Secondly, the federal state where we buy the property will charge 3.5 to 6.5% land transfer tax, and there’s no getting around that either.
- Thirdly, we have to pay the fees for a real estate agent – this is essential, especially in big cities, and can be 3.57% – 7.14%.
Mistake #3: Buy More Property Than You Can Afford
Buying more property than you can afford is a common mistake that can lead to financial difficulties. It’s important to carefully consider your budget and financial goals before making a purchase.
One way to avoid this mistake is to obtain pre-approval for a mortgage before beginning your property search. This will give you a clear understanding of how much you can afford to spend and help you avoid the temptation to overspend.
Mistake #4: Not Saving Enough Money For Reserves
Another common mistake is not saving enough money for reserves. Reserves are funds set aside for unexpected expenses such as repairs or vacancies. It is important to build up reserves to protect yourself from financial difficulties in case of unexpected expenses. Failure to do so may result in a default on the mortgage and possibly even foreclosure.
Landlords are responsible for all repairs and renovations. New property investors sometimes assume that as long as rental costs exceed mortgage costs and assume they can make money. But the unrecoverable costs of owning a property can stack up quickly.
Maintenance is an essential cost of being a landlord. A good estimate of how much you should save to cover maintenance is to have 3 – 5 monthly household net salaries as a reserve, and then continue to save 1 – 2€/sqm/month as an additional buffer.
Mistake #5: Comparing Too many Mortgage Offers
It can be important to shop around to get the best mortgage, but be aware that when your individually request mortgage offers from a bank they will request your ‘Schufa’ (credit) score, which itself will have an impact on the Schufa.
A better way is to use a mortgage broker who will find the best deal for you, based on your personal circumstances. They will ensure you only submit a mortgage application that is very likely to be approved. PerFinEx is a registered independent mortgage broker, and you can contact us at perfinex.de/meeting.
Mistake #6: Thinking Lowest Interest Rate Is Best
While interest rates are an essential factor to consider when selecting a mortgage, it’s important not to assume that the lowest interest rate is always the best option. Low-interest rates can often come with hidden fees and restrictions that may not be in your best interest.
They also often offer no flexibility at all. But your financial situation – your income and expenditure – will almost certainly change a lot over the lifetime of your mortgage. You may want to overpay your mortgage in the future or change the principal amount, for example.
It’s important to carefully review the terms and conditions of each mortgage offer and select the one that best fits your financial goals and budget.
Current Market Interest Rate
Mistake #7: Mortgages With Flexible Interest Rate
While the trend for the past thirty years has been falling interest rates, making variable rate mortgage holders very happy, the past 12 months have been much less kind. Mortgage interest rates quadrupled in a year.
Mortgages in Germany usually have a fixed interest rate to begin with, but once that period ends, they move to a variable rate unless you renegotiate with the bank. If you want to fix your mortgage payments in euros and be able to plan for the future, you need to look for a long fixed interest period.
Mistake #8: Ignoring ‘Bereitstellungszinsen’
Commitment interest is the interest charged by the bank during the time between the mortgage commitment and the actual closing date. Ignoring commitment interest can result in unexpected fees and potentially even rejection of the mortgage application.
This does not apply to existing buildings, as these can usually be let out directly. However, in the case of new buildings from, for example, property developers, this is important as the developer does not receive the purchase price until the house is built.
This can be a problem because banks charge penalty interest on the mortgage amount if you have not drawn it down after a certain time. You need to be sure that your developer has enough time to build the house before the bank charges penalty interest.
It is important that you carefully review the terms of any mortgage offer and ensure that all fees, including commitment interest, are included in your budget.
Mistake #9: Ignoring the Refinancing
If you fix your interest rate for a period, you have to remember that when that period ends, you will have to get another fixed-rate deal or accept a variable rate. In either case, if interest rates have risen substantially when you refinance, your mortgage payments could rise significantly.
You have to plan ahead of time and make sure you can still afford your mortgage if interest rates are higher. You don’t want to be a forced seller when interest rates are high and property prices are low.
Mistake #10: Not Securing Government Bonuses
If you have a building savings contract (Bausparvertrag), you can use the state allowances from our level 2 Riester pension for construction financing. In Germany, there are a number of government bonuses that can help reduce the cost of buying a property.
There are many different subsidy programs offered by the state-owned KfW, and we mean many – including for new property construction, for families with children, for energy-efficient renovations, and for people with disabilities.
Mistake #11: Secure Yourself Against Emergencies
Finally, it is important to protect yourself against emergencies when investing in real estate in Germany. This includes taking out insurance policies. Relevant here is above all household insurance, and term life insurance can also be useful.
You can use the calculator on our website to find out where you can get the best deal. Taking out disability insurance can also be beneficial to ensure that the mortgage can still be paid even if you cannot work.
Conclusion: Avoiding common Mortgage Mistakes in Germany
Avoiding common mortgage mistakes is essential when investing in real estate in Germany. By carefully considering your budget, financial goals, and the terms and conditions of each mortgage offer, you can make informed decisions and minimize the risk of financial difficulties.
Whether you’re a first-time homebuyer or an experienced investor, taking the time to avoid these common mistakes can help you achieve your real estate investment goals in Germany.
If you need help with a real estate loan, feel free to schedule a free consultation with us. We can help you find the best property terms in Germany, secure the best possible loan, and avoid common mortgage mistakes.