German Mortgages Explained

How quickly to pay off your mortgage?

Before closing your mortgage, you must be aware that the typical mortgage is paid back over about 30 years. While it's hard to plan that far into the future, it's important to understand the implication of having a shorter or longer fixed period. You must consider your income growth over this period of time and your job security. Our advanced tools help our advisors to answer these questions, especially the trade-off between short term flexibility but high risk and long-term security but high cost.

It is also useful to understand that in this area the Germans do it differently. While in most countries around the world the standard pay-back period is fixed at a number of years, notably 30 years, in Germany they use the so-called Tilgung approach. You choose what percentage of the mortgage you want to pay back, starting the first year. If you pick a Tilgung rate of 3%, you would pay back 3% of the mortgage the first year. The second year your pay-back would be slightly higher than 3% as your interest payments have declined a little (as your mortgage is lower). So with a Tilgung of 3%, you may pay-off your loan in about 30 years.

Does it make sense to choose such a high Tilgung? Interestingly in Germany interest rates barely increase if you reduce your Tilgung. So if your income is the constraining factor in determining how much house you can afford, but you have good prospects for income growth, then by all means, choose a lower Tilgung. Then over time you pay-off quicker if your income allows you.

Indeed, you could pay-off quicker making use of the so-called Sondertilgung. Nearly every mortgage in Germany includes that option. You can also select a quicker pay-off when you refinance your mortgage and your income has grown. Count on refinancing your mortgage at least once if you stay in your house for a long time, as a 10 year fixed rate is often the best option.