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March 1999

Home cheap Home: Now is a good time to purchase your castle

An article dealing with buying a house in the current market.

There has rarely been a better time to buy property in Germany. Property prices, although no longer falling, are still reasonable. Rents are going up again. Interest rates on home loans are extremely low by historical standards. But how should you finance the purchase of a house or apartment? The first key issue is how much of your own money (Eigenkapital) to put in, and how much to borrow (Fremdkapital). If you are buying a property to live in, you should put in at least 20 per cent of the price; if you want to rent the property out, it is sensible to put in less, as the interest payments on your loan are tax-deductible (steuerlich absetzbar). It is normal to borrow money via a mortgage loan (Hypothekendarlehen) from a bank, usually over a period of around 25 years. The loan can have either an interest rate (Zinssatz) that varies, or one that is fixed, usually for five or ten years. Current interest rates from banks are around 4.5 per cent for a five-year fixed rate loan or around 5 percent for a ten-year fixed-rate loan. As rates are so low, it would be sensible to fix the interest rate on at least part of the loan for a long period. Slightly cheaper “endowment,” loans can be obtained from life-insurance companies. In this case, instead of repaying part of the capital value of the loan each month, you pay back only the interest. The capital sum is then repaid at the end of the loan period, usually from the proceeds of a life insurance policy (Lebensversicherung). Such endowment mortgages are usually tax efficient if you are renting out your property rather than living in it, as you maximize the tax savings from the interest payments. Note, however, that life-insurance companies typically lend only up to 50 per cent of the value of the property. Another traditional option for financing property in Germany is a “Bauspar” scheme. Although there are many different types of these schemes, the basic principle is simple: in return for saving money at a comparatively low interest rate for a number of years (the savings phase), you obtain the right to borrow around twice the sum you have saved at below market rates later (the borrowing phase). This money can then be used to buy or renovate property. Falling interest rates in recent years have reduced the advantage of such schemes to people who took them in the past. It is currently possible to borrow money just as cheaply from a bank without having had the disadvantage of saving at low interest rates for a number of years. Now that interest rates are so low, however, Bauspar schemes are more attractive again. The interest lost during the savings phase is often minimal compared to other savings instruments, and the guarantee of a low borrowing interest rate in the future – when interest rates generally are likely to be higher – is more valuable. For people with lower incomes, there are state grants toward Bauspar schemes, which make them even more profitable. When considering mortages of any sort, shop around, seek independent advice and bargain hard. Consult your tax advisor (Steuerberater) to help with tax-efficient options. Details on Bauspar schemes are found in the Feb. 1999 edition of Finanztest, from Stiftung Warentest.

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