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PROPERTY

EXPLAINED: What you need to know about buying property in Germany

Traditionally a tenant-friendly country, Germany has one of the lowest home ownership rates in Europe. Costs to buy are high, but there are some tax advantages for those who choose to buy.

A view of houses and flats from above in Dresden, Saxony.
A view of houses and flats from above in Dresden, Saxony. Photo: picture alliance/dpa/dpa-Zentralbild | Robert Michael

In the early to mid-2000s, when buyers in countries like the US, UK, and Canada raced against a hot market to snap up homes, German house prices actually fell. That experience has stayed with Germans – even as buying a home in certain cities becomes increasingly unaffordable. Just over half of people in Germany own a home, compared with around 65 percent of people in the UK, and around 75 percent of people in Greece. But even that number hides some pockets where home ownership in Germany is particularly low; in Berlin, less than 20 percent of people own. 

Beyond past experience, costs to buy and sell are steep in Germany, and tenant protections tend to be stronger than in many other countries. Still – for some people, buying in Germany can still come with a few generous tax and investment advantages to make the decision worthwhile.

READ ALSO: The hidden costs of buying a house in Germany 

The drive to buy a ‘forever home’

Experts say Germans generally don’t tend to buy more than one – or even several – homes in their lifetime, unlike some other places. 

“The culture of trading in or flipping isn’t the same here. In fact, there’s plenty of variables which discourage it,” says Nick Mulder, Founder and CEO of Hypofriend, a Berlin-based mortgage broker that specifically serves the expatriate market. 

As an example, Mulder points to the fact that in Germany, you cannot typically prepay your mortgage off until year 10. If you wanted to sell your home before then – perhaps to buy something larger – the contract you have with your bank or mortgage broker will typically require you to still pay the bank the interest they would have otherwise made off you.

Flats in Berlin.

Flats in Berlin. Photo: picture alliance/dpa/dpa-tmn | Zacharie Scheurer

“That gives Germans an inflexible feeling of ‘when we buy we have to buy for the rest of our lives’, says Mulder, adding: “Getting on the property ladder is just not as popular. There is also that cultural risk aversion that comes in more generally.”

READ ALSO: How Germany’s soaring property prices are out of reach for buyers

Several other high fees increase the incentive to buy the right place once, rather than buy to trade it in later. One is the land transfer tax buyers pay after purchasing their home. The exact amount varies by state, but comes in at anywhere between 3.5 and 6.5 percent of the purchase price. 

In addition, a notary must preside over any real estate deal in Germany. During this long process – which can last several hours – the buyer and seller will sit and listen to the notary read out the entire deal, to ensure both sides understand it before signing. The notary will then collect a fee of anywhere between 1.2 to 2 percent. 

Finally, the broker will also collect a fee of a maximum of 7.1 percent, which will be split between the buyer and seller.

“If you compare that to other countries, that’s just an exorbitant amount,” says Mulder.

Mulder adds that it’s less clear in Germany whether buyers should first find the home they want to buy or find a mortgage first, as banks don’t grant pre-approval for mortgages the same way they do in the US. Some places, including his brokerage, may issue a certificate saying how much a buyer can afford, to help make offers more easily.

Buying to let

If you’re not ready to buy your own forever home, many experts say purchasing a place to rent out to someone else is an increasingly attractive option in Germany.

“It is more advantageous, at least tax-wise, to rent out an apartment you own to someone else than to live in it yourself,” says Claudia Müller, Founder of the Frankfurt-based Female Finance Forum and author of Finance, Freedom, Provision – the way to financial independence. “You can, for example, deduct the interest payments on your mortgage off your rental income, reducing your tax burden.”

People have to save for several years to buy a home.

People have to save for several years to buy a home. Photo: picture alliance/dpa/dpa-tmn | Christin Klose

Müller adds that after 10 years, selling a rental property will incur no tax on capital gains – even though the property might not be your principal residence. Meanwhile, a person selling their principal residence pays no capital gains tax after they’ve owned their property for two years.

“If you rent it out, you can claim the respective expenses and any depreciation against the rental income you get. For some investments, there may even be special, higher depreciation rates. Depending on your costs and the rent you receive, the overall result might be negative,” says Dirk Maskow, and independent tax consultant based in Berlin and Düsseldorf. “If that happens, you can offset that loss against your other income, for example from employed or self-employed work.”

“Tax-wise at least, buy to let is a lot friendlier than in some other countries,” says Mulder. “That’s why you’re getting more younger people interested in buying up some small bits of real estate they can rent out.”

READ ALSO: Where in Germany can you still snag a home for under €100k?

What’s next for the German housing market?

As in many place, prices have gone up in Germany and fewer people are able to afford to buy property, with a 10 percent increase seen in recent years.

Mulder says he expects interest rates, or the cost of getting a mortgage, to go up in the next six to 12 months – particularly as Russia’s invasion of Ukraine stokes higher inflation and cost of living.

READ ALSO: How Germany’s property boom could be slowing down

With interest rates in Germany having increased from 1 percent to 3.5 percent, Mulder says banks are getting more selective about who they will lend to, meaning fewer people will be able to afford property. He eventually expects demand to drop accordingly and price increases to moderate – although German property is still likely to increase in value, just at a steadier rate than the major uptick we’ve seen in recent years.

He says to watch out for one major variable that will impact buying behaviour: how German-based companies will view remote work after the Covid-19 pandemic. “If you only have to be in the office one day a week instead of five, you might consider buying in the countryside. If companies are sceptical of remote work, we’ll see people who live in the city who won’t be able to buy.”

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MONEY

Are the EC Card’s days numbered in Germany?

Maestro-function EC cards will no longer be issued as of July 2023. That may leave many people with German cards without the option to use the ubiquitous “EC Karte” abroad. Here's what you need to know.

Are the EC Card’s days numbered in Germany?

In a country that often lags behind much of the rest of the world digitally, cash is still king in many places. From restaurants to bars, cafes, and some smaller shops – options to pay by card are often limited. If a place does take card, it’s often the debit EC card, rather than a credit card or plastic from abroad.

That could soon see a shakeup.

Around 100 million EC cards are currently in use in Germany – more than the number of residents. These cards use two payment services: the Maestro service, which Mastercard provides, and the Girocard service which is independent. Maestro allows the holder to pay with an EC card when abroad, whether at a beach bar in Spain or a museum in Italy.

At home in Germany, Girocard processes EC card transactions.

But the EC card’s popularity here doesn’t translate elsewhere. German cards account for about half of all worldwide Maestro transactions, with the remaining half split absolutely everywhere else in tiny amounts. As such, it’s become difficult and expensive for Mastercard to maintain the old Maestro system that so many people in Germany love to use.

As of 2023, Mastercard will no longer issue Maestro cards, although people can still use ones issued before then until they expire. Without an alternative, that would leave some German debit card holders unable to pay using their new cards abroad.

Rumour has it that a similar Visa service – Vpay – is also on the way out soon.

That could see many cardholders ditch their old EC cards for Mastercard and Visa’s debit services — but around 250,000 businesses in Germany still only take payments made through the Girocard service — which isn’t a part of Visa or Mastercard. A big reason is that retailers pay lower fees to use Girocard.

What are the alternatives to EC Cards?

Where might that leave cardholders in Germany? It might put more pressure on retailers to accept services other than Girocard, which could incur fees that retailers will simply pass on to buyers.

It might leave some people carrying multiple cards, with a debit card they would only ever be able to use at home and not abroad. Or, it might mean carrying more cash just in case people come into an establishment that only takes cash and Girocard.

Some German banks have already moved ahead to offer customers integrated cards.

DKB, an popular online bank in Germany, sees Girocard as an outdated model that can’t be developed much further—and one that’s hard to use for online shopping. Since January, it has only issued customers with a Visa Debit card, but has left them the option to also have a Girocard. This will no longer be free though, costing customers an extra €1 a month.

A customer pays with EC card in a local shop

A customer pays with EC card in a local shop. Many businesses still only take EC card or cash payment in Germany. Photo: picture alliance/dpa | Rolf Vennenbernd

READ ALSO: Why Germans are finally choosing cards over cash

Other banks, like ING, use a ‘co-badge’ system that pays for both the licenses to Girocard and either Visa or Mastercard. However, that leaves cardholders paying a higher fee.

Professor Jürgen Moormann of the Frankfurt School of Finance and Management told Frankfurter Allgemeine Zeitung (FAZ) that MasterCard and Visa are probably discontinuing the Maestro and Visa services for EC cards abroad to put more pressure on Girocard within Germany.

This makes it more likely that retailers will start offering more card-based payment options, such as credit and debit card, to keep things simple for customers.

“They clearly want to increase their market share in Germany,” Moormann says of Visa and Mastercard.

While it’s still too early to tell whether the EC card will be squeezed out, regular cardholders may be left carrying more than one card — or paying higher fees for integrated cards — for a while yet.

In Germany at least, the EC card will be around for some time to come — but its days may well be numbered.

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