The different types of german mortgages

Germany is experiencing unprecedented real estate growth. The average asking price for apartment buildings rose more than 15 % per year over the past couple of years. There have been stable price increases across all property types, including low quality apartment buildings, the luxury market as well as the commercial sector.

This attracts the attention of investors – both from Germany and those from surrounding countries. Locating a suitable investment property is only one step in the property acquisition equation, as most purchases involve some degree of bank financing.

Understanding the different types of German mortgage packages and current interest rates can help investors choose the best option. So here is my explanation of the different types of mortgages:

Types of German Mortgages

There are about as many different types of mortgage options as there are investors.

So I have summarised a few of the most popular options:

(1) Fixed Interest Annuity Loan This is the most common type of mortgage. The borrower pays a fixed payment each month on the liability plus interest over the period of the loan. At the beginning of the loan, the portion paid on the interest is much higher than the principle.

(2) Interest Only (Zinszahlungsdarlehen) Payments are made on the accruing interest only. None of the payment goes to repaying the loan balance. Though this keeps the payments low, the balance owed increases as interest is added but the actual loan is not being paid of. This should only be considered as a short term or interim loan.

(3) Variable Rate Loan(Flexibles Darlehen) 

Variable rate loans work off a variable rate set by the Euribor (Euro Interbank Offered Rate). Based on the how the interest rate changes, the payments will increase or decrease every three months.

(4) Building Society Loan (Bausparvertrag) This very popular type of loan is linked to a building society savings programme. The payments (all or part) are made to the savings programme and in time, these savings are used to pay off the loan.

(5) Bank Home Ownership Programme – KfW (Kreditanstalt für Wiederaufbau) This program is geared towards homeowners and can be used for existing properties or new construction. These types of loans offer incentive programs and very competitive interest rates.