I have had many clients coming to Germany at first looking to purchase the property with cash. There are a couple of reasons for that – they have an idea that mortgage debt is a burden and may result in a possible loss, and second, they assume that getting a mortgage in a foreign country for them is impossible anyway. After the credit crunch in 2008, which led to millions of investors losing their money, it is a valid worry that bank lending is not the most trustworthy option. However, it is worth taking into account the stability of the German economy (which wasn’t affected much by market falls even back then) and current attractive and lending conditions allowing to borrow money “cheap” but in a low risk way.
So why would investors choose to purchase property with a combination of cash and a mortgage instead of just cash? After all, it does include a certain obligation you have to commit to and might possess a certain level of risk, right? Let’s look at the few most common mortgage benefits I often discuss with a new clients:
Purchasing property with a mortgage allows you to buy higher value property, generating more rental income with the same investment amount.
Just think about it, if you have €350,000 in cash, it would allow you to buy one nice apartment in good area or maybe two apartments in the outskirts of the city. Regardless of which option you choose, let’s assume, the rental income is the same, but the risk of purchasing just one apartment is higher because if one apartment becomes vacant, you risk losing 100% of your rent, while if one of your two apartments becomes vacant, you still get 50% of your rental income. So the lower risk strategy often used by experience landlords is to own multiple tenanted apartments. Then think about adding 65% LTV mortgage to your €350,000 equity investment. It would allow you to purchase a property for €1,000,000 which would roughly give you a whole building with 10-15 tenanted apartments. That’s 10- times less risk of vacancy and a lot more of rental income for the same amount of investment.
Can your rental income cover your mortgage interest and repayment?
The current historically low-interest rates allow you to borrow money for as low as 2% interest and what makes it even more attractive is that investors can “fix” these low-interest rates for the next 10 years. This allows you to plan your expenses accurately for the time ahead and predict the amount you need to deduct from your rental income each month. It also protects you from an unexpected rise in rates, which is undoubtedly an important factor to take into account. To our clients, we advise to look not only at the LTV (loan to value) level but focus more on MRR (mortgage to rent ratio) to assure the rent can fully cover all mortgage expenses. In most cases MRR shouldn’t be more than 55% which would leave you with enough cash to cover other costs and leave money on reserve.
- Purchase price: €1,000,000
- Mortgage: €650,000 (65% LTV)
- Rental income 6%: €60,000 per annum
- Annual mortgage repayment: €32,500 (5% annuity)
- Mortgage to rent ration (MRR): 54.1%
When purchasing property with cash, I get all of income because I don’t have all mortgage expenses. Isn’t it better?
In general, when investing in the property it is considered as long term investment and a majority of investors are looking at it as a safe, rooted money deposit which will produce its benefits over time. Of course, if you are looking for immediate income, cash investment might be the best solution, however, many forget that part of your mortgage expenses is paying down the mortgage capital. So this repayment is actually your silent future deposit account. Imagine, after 10 years you have paid down 25% of your mortgage, that means, you have increased your invested equity by 25%. Regardless if you decide to sell your property or re-finance it after 10 years or just continue holding, this money is accumulating there for you, right there in the bank. So the main benefit when financing your property, is that additionally to the net rental income you have left over every month (just as with cash investment) you also silently increase your equity by repaying mortgage capital.
I’m a foreign investor, how can I expect German banks to trust me with a long term mortgage?
That’s one of the biggest benefits you get from investing with us. Our investment structure and strategy allows us to offer our investors full mortgage services when purchasing buy-to-let property. Most of our properties come with pre-arranged mortgages included. We have long-standing relationships with biggest banks in Germany, they know our business, they know us and trust the properties we purchase and can offer best mortgage conditions. So we take off all the hassle from our investors regarding submitting investment plan to the bank, negotiating terms and conditions and we also handle all mortgage repayments each month. Also, the mortgages are non-recourse to the investor, meaning, that even if the property defaults, the bank can seize the property but cannot seek out the borrower for any further compensation.
In my experience, when investors accurately evaluate the benefits of financing your portfolio it doesn’t take much convincing that it is the right option. While the financing conditions are as good as now (and we don’t know how long it will last) and German property market stability allows us to make “smart and calculated investments”, it is the right time for you to level up your investment knowledge and take full advantage of these beneficial times.