The legal process to buy a home in Germany with a mortgage is rather complicated, with plenty of legal jargon, and rather different from other countries. It is also costly and time-consuming. This deepdive therefore spells out all the steps, the terminology and the choices you have.
Table of Contents
The ten steps to buy your property involving the notary
All the key issues and notary terms explained in detail
A summary of the four main choices you have in the notary process
Here are the ten steps that need to be followed after you reach your preliminary agreement to buy your property in Germany:
1. Buyer and seller need to sign a purchase contract (“Kaufvertrag”) in front of a notary. Sometimes a preliminary meeting takes place first, but usually, the buying party just contacts a notary of their choosing and asks them to create a draft of a purchase contract that gets sent out to all parties involved (buyer, seller, agent, mortgage advisor etc). After that you usually have two weeks to review the contract and make suggestions/edits before the actual notary appointment and signing. This 2-week period is mandatory if one of the two parties is a private person while at the same time the other party is a legal body (GmbH, UG etc).
Please be aware that any non-notarized agreements, contracts or arrangements are deemed void under German Law, especially if they’re meant as subsidiary arrangement to the contract. However, once a notarization of the main deed has taken place and the need to change the notarized arrangements occurs, a new notarization is only necessary when basic regulations of the deed must be changed. Your notary will surely be able to counsel you once these necessities occur.
2. Following the mortgage approval, the mortgage contract and land charge form (“Grundschuldbestellungsurkunde”) is created by the bank and sent to the buyer via post. Oftentimes, the drafting/editing of the purchase contract occurs simultaneously while the mortgage application is still getting processed by the bank. This is a common situation as in today’s market sellers/agents push to sign the purchase contract as soon as possible. The notary will require a scanned version of the land charge order form at latest 1-2 days before the notary appointment to prepare all the paperwork. If the contracts do not arrive in time via post, a digital version of the land charge form can be requested from most banks. Please note that there is no pressure to sign the actual mortgage contract before the notary appointment. It is only critical that your mortgage has been conclusively approved.
3. Shortly after signing the purchase contract, the notary will issue a priority notice of conveyance (“Auflassungsvormerkung”) to the local Grundbuchamt or Amtsgericht to record the pending change of ownership and ensure that the seller cannot sell to someone else or mortgage the property further. The purchase contract contains a clause to that effect with no additional costs other than Court Registration Fees connected.
4. The buyer may have to schedule a separate notary appointment for ordering the registration of the land charge, after the bank approves the mortgage application, if the mortgage approval and document sharing process cannot be concluded before the notary meeting for the purchase contract signing. The default is to sign the purchase contract and the request for registering the land charge in the same appointment, but that sometimes does not work. Having a separate appointment does not cost extra as the notary charge fees per legal action, not by the hour. Keep in mind that it takes time for the bank to send the paper versions of the documents, following their approval. At the notary appointment, the notary confirms the will of the buyer to register the land charge. The signing of the loan contract itself does not need to be done in the presence of the notary.
5. Having obtained and notarised the necessary signatures, the notary makes a request at the local Amtsgericht to authorize the registration of the land charge. Depending on the Amtsgericht, this process can easily take 3-4 weeks. If you need to speed things up because of an impending request to pay the purchase price, you can ask your notary to issue a confirmation (“Notarbestätigung gegenüber der Bank”) that proves that the land charge registration has been notarised by providing a ranking certificate (“Rangbescheinigung”). In this way, the notary assures the bank that nothing stands in the way of creating a first-ranking land charge. For many banks, this represents a sufficient proof of security which allows them to pay out any part of the loan amount significantly earlier. However, the notary charges fees for a ranking certificate.
6. The customer pays the taxes and fees (see article). The land registry is registered in the land charge after the relevant invoice is paid by the buyer (around 0.3-0.5% of the price).The bank and the buyer receive a copy of the land charge deed and an extract from the land register via the notary showing that the land charge has been registered with the correct ranking.
7. After receiving the notary's maturity notice ("Fälligkeitsmitteilung") the buyer will need to fill out and sign the payment order form ("Auszahlungsanweisung") to affect the payout of the loan amount. This form is to be sent electronically to the bank along with the maturity notice and the updated land registry with the bank's land charge registered. Typically, 2-3 working days later the payout is issued. The buyer is typically given 2 weeks time to make the payment of the purchase price to the bank accounts.
The notary will make sure that any older land charges, pledges, mortgages whatsoever will be erased from the property register. Thus, he will contact the sellers' registered creditors and obtain all the necessary documents from them. If any of the creditors still claims a remaining loan balance this will also be taken care of in the maturity notice, telling you which exact amount to transfer to the seller and his creditors.
8. The buyer now has to transfer the downpayment from his/her own equity capital to the seller and then instruct the financing bank to pay out the loan amount to the seller and his/her creditors. At this time you usually arrange with the seller to receive the key (in case of a vacant property), and when the transfer of economic ownership takes place. Instead of paying directly, an alternative is that the bank first disburses to the notary ("Notaranderkonto"). This alternative is not often used in Germany as it leads to considerable additional costs. It might be considered if there has to be a fixed date for the transfer of possession.
9. The notary requests registration of you as owner in the land registry after receiving payment confirmation from the seller and similarly from the tax office ( "Unbedenklichkeitsbescheinigung"). The transfer of the legal ownership in the land register usually becomes official only 2-5 months after signing the purchase contract.
10. Congratulations: after all these steps you will own your German home and benefit from some of the lowest mortgage interest rates in the world!
All the key issues and notary terms explained in detail
The purchase contract (“Immobilienkaufvertrag”)
Following an initial agreement on the purchase of a property, this needs to be formalized in front of a notary in a purchase contract to make it binding. The buyer has the right to select the notary but the seller might equally propose a notary office. Most notaries work very similarly and one of the distinguishing factors might be a notary that is also able to provide a German/English version of the purchase contract. The buyer and seller need to provide the notary with the key information and conditions. If available, it is easiest to send the notary the relevant folio of the land registry (“Grundbuchblatt") and the declaration of division ("Teilungserklärung").
Is there a right of withdrawal from the purchase contract?
The notarized purchase contract is in principle binding for seller and buyer. Under certain circumstances, however, it is possible to withdraw from the purchase contract or have it reversed. This is the case, for example, if the buyer does not meet his payment obligations or the seller has demonstrably concealed defects in the property when the contract was concluded. If, contrary to expectations, you are unable to pay for the house, you will be liable with all your assets up to and including foreclosure, for the costs implied. It is possible to include a withdrawal clause (“Rücktrittsklausel”) in the purchase contract but sellers usually do not like having such an exit clause notarised because it gives them no security that the purchase will come through.
Encumbrance power of attorney (“Belastungsvollmacht”)
If the purchase price is to be partially or fully financed through a mortgage, the purchase contract should contain a so-called encumbrance power of attorney (“Belastungsvollmacht”). By signing a purchase contract containing this clause, the seller grants the buyer’s financing bank the right to have a land charge (or lien) registered before the buyer actually owns the property. Then after the land charge is registered, the bank is later willing to disburse the loan amount without the buyer actually owning the property yet.
In other words, this clause solves the chicken and egg problem--how can you get the money from the mortgage bank, to pay the owner to transfer the property, before the bank has the certainty of being entitled to the property if needed.
Prior notice of conveyance (“Auflassungsvormerkung”)
After signing the purchase contract, the priority notice of conveyance is made. It is technically not mandatory, but absolutely highly recommended. With the priority notice, the pending change of ownership of a property or land is bindingly recorded and the ownership of the object is reserved in the name of the buyer. According to Section 883 of the German Civil Code (BGB), the buyer is registered as the future owner and thus acquires special rights. The priority notice of conveyance is also important to obtain a mortgage, because it serves as security for the lender - and is sometimes even required.
The land charge is needed for the bank to lend you money
The land charge (“Grundschuld”) is a lien on a particular piece of land to secure the payment of a sum of money. It is entered in the land registry of the local municipality to secure the creditor’s claim to repay a debt. In other words: you cannot sell the land without paying the mortgage.
The land charge is regulated in §§ 1191, or the "Property Law" of the BGB. Having a land charge gives the debtor the legal right to sell the land in a public auction to reclaim the debt or put it under forced administration (“Zwangsversteigerung/Zwangsverwaltung”). Because of this security the bank is willing to lend you the money at a relatively low interest rate.
What is a land charge order (“Grundschuldbestellung”)?
In order to create the land charge, you as the buyer or owner agree to the entry of the land charge in the land register.
In Germany, only a notary can arrange for a land charge to be created. It is the task of the notary to document and certify the will - and thus the consent - of the debtor to establish the land charge. Indeed, the notary must inform the owner of the risks involved in establishing a land charge and ensure that his/her consent is given voluntarily.
Only then may the notary draft the deed to establish the land charge. If there are several buyers of a property that is to be encumbered, the land charge must be signed by each buyer with the notary.
Why is an encumbrance power of attorney needed?
A land charge can in principle only be registered once the change of ownership has been completed in the land register. Therefore, the seller grants the buyer a so-called encumbrance power of attorney (“Belastungsvollmacht”) in the purchase contract. The power of attorney entitles the buyer to arrange in principle for the land charge to be registered even before the ownership title is officially transferred to the buyer. Otherwise, banks are not willing to pay out the loan as they are not sure a lien could be registered, and this could then thwart the sale.
Who prepares the land charge order form (“Grundschuldbestellungsurkunde”)?
The basis for the notarial certification of the land charge is the land charge order form. This form is usually issued by the bank that offers the financing. After the notarisation of this document in the presence of the buyer (note: the seller does not need to be present), the notary forwards the documents to the land registry of the relevant municipality.
The costs for the land charge may vary depending on the requirements and standards demanded by the bank. A so-called service fee for the notary (“Betreuungsgebühr”) will be caused if the bank fails to accomplish the necessary to ensure the owners safe position within process of registering the Grundschuld by herself (“Sicherungsabrede”), thus making it necessary for the notary to additionally see for those regulations. Most banks unfortunately have practices leading to this extra fee. Exceptions are some Sparkassen like Schwäbisch Hall and LBS. This service fee is also added if the bank wishes to immediately set the binding effect of the mortgage according to sec. 873 (2) BGB. This usually is required for very high loan amounts (over 1 million).
How long does it take to create a land charge?
Once the documents have been submitted to the land registry, it takes about four to six weeks for the land charge to be registered. The bank does not pay out the loan until proof of the registration is available.
However, the notary can speed up the disbursement. To this end, after inspection at the land registry, the notary confirms to the bank with a so-called notary confirmation (“Notarbestätigung gegenüber der Bank”), that nothing stands in the way of a registration of the land charge in line with the ranking. Many financiers already pay out the loan on the basis of this confirmation. Additional costs are incurred for the notary's confirmation.
What does the land charge deed (“Grundschuldbestellung”) say?
In the land charge deed, the encumbrance of the property with a land charge is spelled out. For this purpose, the deed contains precise information about the property to be encumbered. In addition, the deed contains other rights:
Compulsory execution (“Dingliche Zwangsvollstreckung”): the borrower agrees that the bank is entitled to initiate immediate execution in the event of default. The borrower holds an immediately enforceable title in the form of the land charge deed.
Abstract acknowledgement of debt (“Abstraktes Schuldanerkenntnis”): In the deed, the borrower submits to immediate compulsory execution for all his assets. In other words: Not just the real estate serves as collateral, also your other assets. The bank also has the right to attach the borrower's other assets to satisfy outstanding claims, such as bank accounts or stocks. With the enforceable copy of the deed, the bank can begin enforcement without prior action.
What are the requirements for the registration of the land charge?
In order to register the land charge in the land register with the proper ranking, the property must be free of encumbrances. This means that existing land charges must be deleted. This requires the consent of any creditor, be it the tax office or a mortgage bank. Hence the seller's residual mortgage debt must be paid so that the property is transferred free of debt. The notary usually handles the redemption of such debt.
Size of the land charge and why a “Hypothek” is not used?
Land charges are set in a fixed amount and do not depend on the size or scope of the secured loan. Land charges can therefore be used as security for other claims even after they have been created by simply extending the security agreement accordingly. For example, if you want to reborrow what you already repaid on your mortgage, your bank does not require a new land charge but can use the existing land charge. This saves you cost and time.
This is also the reason why in practice land charges are used and not a Hypothek. Hypothek refers to the old practice where the size of the land charge was equal to the size of the loan and would decline with the loan. Once the loan amount associated with a Hypothek was paid off, the Hypothek would automatically get deleted from the land charge.
Note that in addition to the actual land charge, land charge interest (“Grundschuldzinsen”) and ancillary charges (“Nebenleistung”) are usually registered.
What is land charge interest (“Grundschuldzinsen”)?
Land charge interest may sound like an additional mortgage cost. Fortunately, this is not the case. Land charge interest merely increases the amount of the registered land charge. The typical land charge interest rate the banks require is 15 percent per year, and is calculated from the day the land charge was ordered. The increase in the land charge is a precautionary measure to allow the bank to collect any back interest when the bank forecloses the property.
To be clear: this is not a penalty interest rate. When you are late paying your mortgage German banks can levy a penalty interest rate (“Verzugszinsen”) which is regulated by the Bundesbank and currently is five percent. Even during a foreclosure the interest rate specified in your mortgage contract applies. Hence this is more a paper tiger: in case the interest rate is much higher in a prolongation of the mortgage, the bank is protected, and the bank does not need you to go to the notary again and change the land charge.
From a cost perspective it is good to know that the notary fees are only charged over land charge excluding the “Grundschuldzinsen” or the "Nebenleistungen".
What are the land charge auxiliary costs (“Nebenleistungen”)?
The land charge auxiliary payment also only comes into play in the event of a foreclosure. The bank could use the amount to cover the costs incurred for the foreclosure itself. Some banks do not include this charge. Others require an increase in the land charge of five to ten percent of the total loan amount. In the current market situation, most banks waive the right to charge auxiliary costs.
Should I choose a book or letter land charge (“Buch or Briefgrundschuld”)?
After certifying the buyer’s intent, the notary forwards the documents to the land registry of the relevant municipality. The entry in the land register can then take place in two ways: as a book land charge (“Buchgrundschuld”) or as a letter land charge (“Briefgrundschuld”.
Book land charge: This is entered in Section III of the land register.
Letter land charge: In addition to the entry in section III, the land registry will issue a land charge on a form from the Federal Printing Office.
The benefit of a letter land charge is that it can be passed on safer than an “unlettered” land charge. So Bank A can sell the mortgage to Bank B. The drawbacks are that it incurs extra cost, the letter could be lost--a costly event to get it annulled--and it takes more time. Banks in Germany dont sell their mortgages anymore to other banks. Therefore the drawbacks outweigh the benefits of the brief land charge, and the book land charge is now used in virtually all private mortgages.
Transfer of beneficial/economic ownership
After you (and the bank) have paid the seller the purchase price, you can arrange for the official handover of your new property. You can therefore already use the property and will bear all obligations and burdens from this point on. In the case of buying an apartment you will be required to make your monthly maintenance contribution (“Hausgeld/Wohngeld”) to the owners’ association from the moment where you take over the apartment. If you are buying a single/double family house, you will need to take care of an appropriate building insurance. As an apartment owner, the cost for the building insurance is already included in your monthly maintenance fee.
Transfer of official ownership in the land register
The transfer in the land register usually becomes official only after 2-5 months after signing the purchase contract. Only then are you both the beneficial owner and the legal owner of the property.
A summary of the four main choices you have in the notary process for buying a German property:
“Notaranderkonto”: using the notary's escrow account incurs substantial extra cost and is not necessary in Germany. German practice (paying directly) differs very much from other countries and uses other solutions (see above). The cost is 0.2-0.3% (635 Euros plus 19% VAT for a house price of 300.000 EUR).
“Buch- or Briefgrundschuld”: Briefgrundschuld has mainly benefits for the banks--it helps them sell the mortgage to other banks--but they don't insist on it anymore. The extra cost of a Briefgrundschuld is about 0.05%-0.07% of the land charge (190 Euros for a land charge of 300.000 EUR) and this you can avoid.
“Notarbestätigung gegenüber der Bank”: you can speed up the payout process by the bank using your notary's confirmation that a land charge will not run into problems. Only used if you are in a hurry as it incurs extra cost (same as Briefgrundschuld but the VAT (“Mehrwertsteuer”) comes on top as this service is delivered by the notary).
A single notary appointment for signing the purchase contract and land charge confirmation: if your mortgage contract has been approved and you have received the documents, you only need one appointment. One appointment may save you travel time and focus, but not money. The notary fees depend on the action the notary takes. When notaries are busy, as they often are, it may speed up the process and not unnecessarily delay the payout process of the mortgage.
The article benefited from a close review by Berlin based Notar Dr. Robert Scherzer.