Even in Germany, the days of historically low interest rates seem numbered. Looking at the indications of the European Central Bank, an interest rate turnaround seems to be in sight. Rates for real estate loans have been rising for some time but, since the beginning of this year, the speed has increased.
For example, the average interest rate on a 10-year fixed-rate mortgage loan amounting to 80 percent of the property purchase price is currently 1,49 percent. Around two years ago, at the beginning of the coronavirus pandemic, it reached the historic low of 0,62 percent. For 15-year fixed-rate mortgages, the rate has risen within two years from 0,89 percent to 1,69 percent.
As the graph below shows, the interest rate has returned to the same level as in 2018:
What should homebuyers in Germany do to secure favourable interest rates?
With rates rising, therefore, lots of people are trying to get their financing packages confirmed as soon as possible, to secure an interest rate that will remain favourable in a long-term comparison. This is a good approach, but it takes some research and preparation. Here’s what you need to think about.
Firstly, it’s important to know that banks only offer financing for specific purchase projects. In concrete terms, that means that if you haven’t found a property yet, it’s not possible to lock in the current interest rate.
Nevertheless, you can still prepare yourself and identify the right bank ahead of time, ready for when you do find your dream home. This allows you to prepare all the necessary documents to submit together with your application. Only when all of the required documents have been submitted will the bank process your application and lock in your interest rate.
This is especially critical when you consider that banks suddenly announce a rise in their interest rates and give interested customers just one or two days to submit their case under the old conditions. In situations like these, it pays to have all of your documents already in order.
Documents to prepare to streamline your mortgage application
In order to avoid a hectic situation, therefore, before you even start your property search and approach banks, it’s a good idea to have the following documents prepared:
If you are in permanent employment
People working in Germany under a permanent contract need the following evidence for their mortgage application:
- Last three salary slips
- Income tax certificate from the previous year
- Bank statements showing proof of your equity capital
- Last income tax assessment and corresponding income tax return (if you have one)
If you are self-employed
If you are self-employed, the documents required are a little different. You will need:
- Annual financial statements (Jahresabschluss) for the last two years
- Business assessment (BWA) for the current year
If you are not yet in possession of these documents, you will not be able to apply for a loan from a German bank. Banks do not make exceptions, no matter how large your income is. Nothing works without this evidence.
Evidence relating to the property
You will also need to prepare some documents relating to the property you wish to purchase, once you have found it. You will need:
- Exposé of the apartment or house with photos
- A current extract from the land register (Grundbuchauszug)
- The declaration of division (Teilungserklärung)
- Cadaster map (Flurkarte)
- Floor plan showing measurements
- Draft of the purchase contract
- Qualified living space calculation
Benefits of working with a mortgage broker
Unfortunately, not all real estate agents and owners are perfectly prepared and able to provide all the documents. Therefore, it is advantageous to work with an experienced mortgage broker who knows where to obtain the documents and also actively participates in the procurement process.
The qualified living space calculation, for example, is still treated very carelessly by many estate agents and is the biggest brake on the purchase process. You might hear statements like: "We have never needed that. Your bank is the only one that wants it." Unfortunately, however, this is just a protective claim for a lack of sales preparation on the part of owners and brokers. All banks now require this document, and that includes the big players such as ING, Sparkassen, Commerzbank, Deutsche Bank, Sparda Banken and Volksbanken.
A cadastral map and a current excerpt from the land register are also required. This is all the job of an estate agent but, unfortunately, many prospective buyers are often very unlucky here and run into issues procuring these documents. This is where a mortgage broker can help.