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German mortgage fundamentals

What is Loan-to-value and why does my down payment matter?

Generally, you should have enough savings to cover the purchase fees. Lenders will want you to use your savings to cover all upfront costs, in this way, in case you cannot pay the mortgage the value of the house can cover the loan. If your savings are higher than your purchasing costs, you can use this to reduce the so-called Loan-to-Value (LTV) ratio. This is the ratio of the loan to the value of the property as assessed by the lender.


If you want to purchase a property of 300.000 € with 8,00 % fees, you must cover 24.000 € in fees out of your savings. If you have an extra 30.000 €, this means that you need a loan of 270.000 €.

270.000 € / 300.000 € = 90,00 %

That means your Loan-to-value is 90,00 %.

Loan-to-value is the primary determinant for the interest rate. So the higher your LTV, the higher the interest rate. Whether it makes sense to take a high LTV depends on the cost difference.


95,00 % LTV Loan for 300.000 € costs 1,50 %

90,00 % LTV Loan for 300.000 € costs 1,30 %

Whether you go for 90.00% or 95.00% depends on how you would otherwise use the 5% difference or the 15,000€. If you are a savvy investor, you would check if your return on equity is higher than the cost of the higher interest rate.

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