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German mortgage fundamentals

How to choose the right fixed interest period?

The most common mistake that many first-time buyers make is locking in or fixing interest rates for a period that is either too short or too long. In general, buyers are too often fixated on the initial interest rate. For example, a mere 10 basis points or 0.1% on a 200,000€ loan will result in a difference of approximately 200€ to 300€ per year.

In comparison, being left with a pile of debt at the end of the fixed period with interest rates that have doubled since the start could result in costs of 2,000€ to 4,000€ per year, and cause considerable financial hardship depending on your situation. Similarly, having a very very long fixed period may result in high cost, inflexibility, or exorbitant cancellation fees when you move early.

Difficult choices? Indeed. Hypofriend’s Recommendation Engine (Optimizer) will recommend the optimal fixed interest period for your situation. Discuss the results with our experts to find one that balances cost and financial security and freedom.

In general, the following rules apply:

Don’t fix too short:

In making this decision, you may want to be aware that in Germany very short-term interest rates for mortgages are not very low. So, it rarely pays to have a variable rate or say 1-3 year fixed interest rate. But, importantly, as illustrated above: if you want to stay in your house for a considerable time period, you want to limit the risk of interest increases during that period.

Don’t fix too long:

Nearly all banks In Germany require you to pay a cancellation fee if you move houses. If you move houses before your fixed interest period ends, you owe the bank a fee equivalent to the loss they make when reinvesting the proceeds. Fortunately, after 10 years you are legally entitled to refinance cost-free and no such penalty could be levied when you invoke that clause. Note that, in big cities, you can virtually always rent your house for more than the mortgage payments, and it often makes sense to rent out your house instead of selling to avoid the early repayment fees, while benefitting from net income.

Most importantly: Many people don’t realize that taking out a fixed interest rate for 30 years is often overkill from a financial security perspective. After 20 years the amount left on the mortgage is often small, while your income has increased, and it is quite likely that you have actually moved house or want to refinance. Whether this is the case often depends on your age and income growth.

Our experts have the advisory tools to simulate for you the various options and recommend optimal solutions. Schedule your free consultation now.

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