Depending on your personal situation, it can still be relatively difficult to buy a house or apartment, even with a well-paying job. Particularly for young or first-time buyers, if you have little to no savings to use as equity, it is difficult to be considered for a mortgage. However, it is certainly not impossible. Some providers in Germany will offer you a mortgage with no equity, covering 100% of the purchase price of the property. Some will even offer financing of up to 120%, covering the additional costs as well. As may be expected, though, these mortgages are only available under specific circumstances. Read on to find out more.
Out of pocket
With German mortgage rates amongst the lowest in the world, it makes perfect sense to arrange some kind of financing to assist you in buying an apartment. However, most mortgages will only cover 70-80% of the purchase price. When buying an apartment in Germany, lenders will expect you to pay the additional 20-30% out of your own pocket, as a down payment on the property. (Here’s some advice on how you can save for a down payment)
On top of this, there are also considerable additional costs involved, such as land transfer tax, notary costs, and commission, which can amount to 10-15% of the purchase price. All of this can make it extremely difficult for those without adequate long-term savings to buy their own home, so a mortgage which covers some, or even all, of these costs can be very beneficial.
There are obviously conditions attached to these mortgages, and it is not possible for everyone. The conservative nature of German finance, and their attitude towards credit in general, mean that German mortgage lenders will look into your credit-worthiness more closely than in other countries (for more about financing in general, take a look at our Financing Fundamentals article). If you are applying for a mortgage with no equity, they will examine your situation even more closely.
Firstly, you must have permanent residency in Germany to qualify for a 100%+ mortgage. If you are a limited resident, such as an EU Blue Card holder, you will be able to get financing covering 100% of the purchase price, but would need to cover the additional closing costs with your own money. If you are a foreign investor, or you do not have the right to live and work in Germany, you will not qualify for full financing, and will have to pay the additional 20-30% plus additional costs out of your own pocket.
Secondly, you will need to have a good credit score. In Germany, your credit rating is determined by Schufa Holding AG, a private company which keeps records of your credit individuals. They measure how reliably you have met financial obligations, such as whether you have paid your utilities and other bills on time. This information can then be accessed by companies and banks, and used to decide whether you are eligible for further obligations like personal loans. If you apply for a mortgage, your Schufa will determine whether the lender will consider you for a loan with no equity, and how much interest you might pay for that loan. Obviously the better the credit score, the more lenient the lender is likely to be with you.
Alongside your credit rating, mortgage lenders will be very interested in your job security and financial stability. If you are employed, you will have to provide 3–6 months of pay slips as proof of income. As you may imagine, a high-income earner is more likely to receive a 100%+ mortgage, though even this is usually limited to around eight times your income.
Mortgage lenders tend to assess freelancers and the self-employed more strictly. If you are freelance or self-employed, you will be expected to provide up to two years of balance sheets, business and economic evaluation, as well as the prior year’s tax returns. You should try to ensure that you have enough savings to cover any mortgage payments without getting into any financial problems.
Location, location, location…
When applying for a mortgage, the location and condition of the property are always important factors. The property acts as collateral, so the lender wants to ensure that it will get a sufficient return on its outlay, even if the borrower defaults in their payments. However, the location and condition of the property are even more important here, as the lender is taking more risk. So make sure you are not overpaying for the property, or that it is not a risky proposition.
Speaking of risk…
If the lender is willing to offer you full financing on a property, they will also have more demanding conditions. As the risk of default is greater than for a regular mortgage, a 100%+ mortgage will usually have a higher rate of interest than if the loan were backed by your own personal equity. Germany still has relatively low interest rates, but given the length of period for this type of loan, that interest adds up to a considerable amount. You will thus also have to pay higher monthly repayments than for a regular loan.
As a result of this increased risk and higher payments, it is generally recommended that borrowers who finance an apartment without equity capital take out residual debt insurance to protect themselves against possible payment defaults.
So, even if you have no savings to use as a down payment on an apartment, there is no need to give up on your dream of home-ownership. A mortgage with no equity is certainly possible, and financing of up to 115% or 120% can be possible, depending on your personal situation. However, you will end up paying more, and the associated risks are higher. With a 100% mortgage, even a modest fall in house prices could leave you at risk of slipping into ‘negative equity’, where the property is worth less than the amount you’ve borrowed. Nevertheless, it can be very useful for those with little savings, and at the end of the day, perhaps it is worth the risk to end up owning your own home.