German Mortgages Explained

Why is choosing my fixed interest period the most important decision?

The most commonly overlooked decision 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 a financial catastrophe. Similarly, having a very long fixed period may result in high cost, inflexibility or exorbitant cancellation fees.

In general, the following rules apply:

Don’t fix too short:

 In making this decision you may want to be aware that one of the most important differences with other countries is, 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.

Don’t fix too long:

 The other important difference with many other countries is that you may have to pay the bank a cancellation fee if you move house. If you move house before your fixed interest period ends, paid off your mortgage, and the interest that the bank can get at that time when reinvesting the proceeds, you owe the bank the difference. Yes you read that correctly. Fortunately after 10 years you can refinance cost free and no such penalty could be levied when you invoke that clause. Moreover, in big cities you can virtually always rent your house for more than the mortgage payments.

In addition 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.

The upshot of this is, that most people will want to choose a fixed rate period of between 5-20 years, and that the period in which you want to stay in your place or are willing to rent it out is an important factor in your decision on interest rate fixity.

Difficult choices? Indeed. Use our "right mortgage" tool and discuss with our experts the optimal fixed period, one that balances cost and financial security and freedom. 
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