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Real estate financing: become your bank's darling
The author:
Michael Ruppel
Financial Expert at Expat Compass Germany
Real estate financing: become your bank's darling
When it comes to financing a property, your banker is your most important partner. No money, no property. The financing of a property can be planned long before the purchase and the strategy can be optimized through careful planning and preparation. There are a number of steps you can take to increase your chances of successful financing and secure an advantageous position with the bank. In this article, we will discuss the most important tips and strategies to become the bank's favorite.
1. credit check
A good Schufa rating is crucial for getting a loan. Schufa (Schutzgemeinschaft für allgemeine Kreditsicherung) stores information about the payment behavior of private individuals. A positive Schufa report signals to the bank that the applicant is creditworthy. It is therefore advisable to regularly obtain a self-disclosure from Schufa in order to be able to correct possible errors or outdated entries in good time.
The free SCHUFA information is available here: https://www.meineschufa.de/de/datenkopie
2. second house bank
Having another bank account can be an advantage. A second house bank can not only serve as a backup, but also offer additional financing options. A second bank account also allows you to negotiate better conditions, as you can take advantage of the competitive situation between the banks. The second bank should also see your income streams in the account. For example, you can first transfer your salary to the first account and then to the second account. Combining two different types of bank has also proven to be a good idea: A large branch or online bank (like DKB, Commerzbank, etc.) and a local savings bank or cooperative bank (VR-Bank)
3. consumption and financing behavior
Responsible consumer and financing behavior is essential. Banks not only look at your current income and assets, but also your spending habits and existing liabilities. It is therefore important to avoid unnecessary loans and reduce existing debts as much as possible.
4. overdraft check
An overdrawn overdraft facility (overdraft facility) can have a negative impact on creditworthiness. It is advisable to regularly check and balance the overdraft facility. A permanently overdrawn overdraft facility signals financial difficulties to the bank and can lead to a rejection of the loan application.
5. account movements
Banks analyze the account movements of the last few months to get an idea of the applicant's financial situation. Regular and orderly income and a sensible expenditure structure are an advantage. Unexplained or irregular account movements can arouse suspicion. Chargebacks are extremely bad.
6 Equity / liquidity
The more equity you bring in, the lower the risk for the bank. A high equity ratio improves the loan conditions and increases the likelihood of approval. In addition, sufficient liquidity signals financial stability and reliability.
7. equity leverage
Equity leverage refers to the ratio of debt to equity. A high equity leverage means that a larger proportion of the financing is covered by equity. This reduces the risk for the bank and can lead to better credit terms.
8. requirements profile of the banks
Each bank has specific requirements and criteria for granting loans. It is important to know these and prepare accordingly. This includes compiling all the relevant documents and evidence required by the bank. Careful preparation can speed up the process and increase the chances of a positive decision.
9. Act quickly / provide the documents
Acting quickly and efficiently can make all the difference. Providing all the necessary documents and evidence on time shows the bank that you are organized and reliable. Delays, on the other hand, can lead to uncertainty and possibly rejection of the loan application.
10. financing strategy without long-term equity commitment
A flexible financing strategy without a long-term equity commitment can also be advantageous. Instead of contributing equity directly to the financing, it can be used as collateral, for example by lending against credit balances. This frees up your own credit balance more quickly for new real estate projects. This increases financial flexibility and can also improve the loan conditions.
Conclusion
Optimizing your position vis-à-vis the bank requires thorough preparation and a strategic approach. By taking the above tips and measures into account, you can significantly increase your chances of successful real estate financing and secure the best conditions. A good credit rating, responsible financial behavior and a flexible financing strategy are the keys to success.
Buying real estate in Germany: A comprehensive guide Buying a property in Germany can be an exciting but complex journey. Here are the nine steps you need to go through to successfully purchase your new home: Step 1: Check your budget The first step is to determine your financial capacity. In Germany, this mainly depends on your income, your equity, your age and your residency status. Step 2: Meet with a financial advisor with expertise in real estate finance An advisor can not only help you determine your financial capacity, but also find better mortgage deals. While banks often only offer their own products, an independent mortgage broker can compare offers from different banks and possibly negotiate better terms. Step 3: Search for a property With a realistic budget in mind and a provisional mortgage commitment, you can now start looking for a property. Explore different neighborhoods or cities to get a feel for what it's like to live there. Use consolidated search tools to filter available properties by price, number of rooms and key features such as a balcony or garden. Step 4: Check the property value In Germany, houses are not sold that often, so it can be difficult to assess the asking price. Check the floor plan of the property to assess the square footage and room layout. Your mortgage advisor can also give you a price assessment, which can be helpful in negotiations. Step 5: View the property Once you have found a property you are interested in, view it in person. A financing certificate from your mortgage advisor can help set up an appointment with the real estate agent or owner. If you are interested after the viewing, check again with your advisor whether the property is suitable for you and what the mortgage terms would be. Step 6: Make an offer The next step depends heavily on the current market. In a tight market or with a property in high demand, you should be prepared to act quickly. Step 7: Finalize your mortgage The main cost of buying a home is the mortgage. Your mortgage advisor will go through the key elements of the mortgage with you and show how factors such as term, interest rate and deposit will affect your monthly payments. Choose the best mortgage based on the deals available and secure the best terms. Step 8: Sign the contract Once your offer has been accepted, a notary will be instructed to draw up a purchase contract for both parties to sign. Before signing, the mortgage must be approved. A good advisor always has a plan B to ensure that the mortgage is signed on time. Step 9: Take over the keys The whole process from making an offer to handing over the keys can take around two months or more. After signing the purchase contract, you pay the deposit to the seller and authorize the bank to transfer the loan amount.
How to Deduct Renovation Costs for Rental Properties in Germany As a landlord in Germany, high renovation costs are often inevitable. The key question for tax purposes is whether these expenses qualify as maintenance costs. Here’s a guide to help expats navigate this aspect of property ownership. Full Deduction for Renovation Costs Whether it’s a new heating system, a modern bathroom, or facade insulation, landlords can fully deduct renovation or modernization costs from their taxes. This includes minor repairs, such as unclogging a drain or repainting, as well as major renovations like a new roof. The critical factor is that these costs must be classified as "maintenance expenses" (Erhaltungsaufwand). Only then can they be fully deducted in the year they were paid. Maintenance vs. Improvement Costs If the costs are deemed "improvement expenses" (Herstellungsaufwand), they can only be deducted over several years. Maintenance Expenses: Defined by the Ministry of Finance as costs for renewing existing parts or facilities. For example, replacing old windows with new, double-glazed ones qualifies. Improvement Expenses: Costs that increase the property’s value or usable space, like adding a dormer that enlarges the living area, may be classified as improvement expenses, which must be depreciated over time. Two Deduction Methods Landlords can choose to: 1. Deduct the full cost in the year the repair was paid. 2. Spread the costs evenly over two to five years. When to Deduct Full Costs Immediately If you have a high income, deducting the full costs in the same year can significantly reduce your taxable rental income and lower your overall tax burden. When to Spread Costs Over Several Years If your income is low, spreading the costs can help keep your taxable income below the threshold, potentially eliminating your tax liability. Specific Scenarios Even if you sell the property before the end of the depreciation period, you can continue to deduct the annual renovation costs. Special Consideration: Costs Exceeding 15% of Purchase Price If renovation costs exceed 15% of the property’s purchase price within three years of acquisition, these expenses must be added to the property's purchase price and depreciated over several years: - 2% per year for 50 years. - 3% per year for 33 years for buildings completed after January 1, 2023. Additional Savings: Damage Compensation If construction defects necessitate the renovations, you might be able to claim compensation from the previous owner, which can be deducted from the renovation costs. Note for Tenants and Homeowners Tenants and homeowners can only deduct a portion of their renovation costs.
Maximizing Real Estate Investments - From Rental Income to Personal Residence: The buy–rent–use concept Introduction Investing in real estate is a significant financial decision, and strategic planning can yield substantial benefits. One effective strategy is purchasing a property with the intent of renting it out initially, and later converting it into a personal residence. This approach not only leverages tax benefits but also facilitates mortgage repayment through rental income. This article delves into the specifics of this strategy and explores additional concepts like the "Ehegattenschaukel" to further enhance tax efficiency and depreciation. Initial Acquisition and Rental Phase The first step in this strategy is the acquisition of the desired property. At this stage, the primary objective is to rent out the property. Renting serves multiple purposes: 1. Tax Deductions: During the rental phase, all expenses related to the property, including mortgage interest, maintenance, and renovations, are tax-deductible. This can significantly reduce the investor's taxable income. 2. Mortgage Repayment: Rental income can be utilized to pay off the mortgage, thereby reducing the principal amount owed over time. This is particularly beneficial as it allows the investor to leverage the rental income for financial gain. 3. Renovations: Any renovations undertaken during this period are also tax-deductible, providing an opportunity to enhance the property's value at a reduced cost. Transition to Personal Use Once a substantial portion of the mortgage has been repaid and the property has been adequately maintained and upgraded, the investor can transition the property for personal use. By this stage, the financial burden of the mortgage is significantly lighter, making it easier to afford the property as a personal residence. Tax Benefits and Financial Planning The transition from rental property to personal residence is not merely a change in usage but a strategic move that comes with its own set of tax benefits: 1. Long-Term Capital Gains: If the property has appreciated in value, the investor can benefit from favorable long-term capital gains tax rates when they eventually decide to sell the property. 2. Depreciation Recapture: During the rental period, the investor can claim depreciation on the property, reducing their taxable income. Although this must be recaptured upon sale, the tax savings during the rental period can outweigh the eventual tax burden. The "Ehegattenschaukel" Concept To further optimize tax efficiency, investors can utilize the "Ehegattenschaukel" (spousal swing) strategy. This involves transferring ownership of the property between spouses to maximize depreciation and reduce taxable income. Here's how it works: 1. Ownership Transfer: The property is transferred from one spouse to the other, often at a time when the property has appreciated. The receiving spouse can then reset the depreciation basis, effectively allowing for additional depreciation deductions. 2. Tax Bracket Management: By strategically transferring ownership, couples can manage their individual tax brackets, ensuring that the rental income and associated deductions are taxed at the lower rate possible. Conclusion Investing in real estate with a planned future use as a personal residence offers a myriad of financial benefits. By renting out the property initially, investors can take advantage of tax deductions, utilize rental income for mortgage repayment, and enhance the property's value through tax-deductible renovations. Coupled with strategies like the "Ehegattenschaukel," this approach maximizes tax efficiency and depreciation, making it a highly advantageous investment strategy for savvy real estate investors. Implementing this strategy requires careful planning and a thorough understanding of tax regulations. Therefore, consulting with a tax professional or financial advisor is recommended to tailor the approach to individual financial circumstances and ensure compliance with applicable laws.
Using a Riester contract: opportunities and challenges Introduction Many people in Germany have taken out a Riester contract to provide for their old age. In principle, this state-subsidised pension scheme offers a number of advantages, but it also faces significant challenges. One key problem is the guarantees that must be provided for all contributions and allowances paid in. This article sheds light on the problems associated with Riester contracts and highlights alternative uses, particularly in connection with the financing of owner-occupied residential property. The problem of guarantees A Riester contract must guarantee that the contributions and allowances paid in will be available at the end of the contract term. In order to fulfil this guarantee, part of the contributions are invested in secure investments such as bonds. Even if Riester contracts invest in funds and ETFs, part of the contributions remain in these safe investments. In times of low interest rates, however, this creates difficulties: the performance of these safe investments is often so poor that an ever greater proportion of the contributions must be invested in them in order to fulfil the guarantees. As a result, Riester contracts generate little or no return, especially after deducting costs. Although the promised tax benefits and guarantees remain in place, the actual return is often disappointing. Alternative use of the Riester contract: Home ownership However, a Riester contract can also be used in another way, namely to finance owner-occupied residential property. Riester home loan and savings contracts and the option of withdrawing capital are particularly suitable here. The capital from a Riester contract can be used for You buy or build a flat or house, or repay a loan taken out for this purpose, You buy compulsory shares in a housing cooperative in order to move into a cooperative flat or repay a loan taken out for this purpose, You are financing a remodelling project to reduce barriers in your home in an age-appropriate way, or You finance an energy-efficient refurbishment in or on the property. Advantages for high earners There is an interesting concept for high earners with a high tax burden: tax relief on the repayment of your own property. Saving for a Riester contract is tax-incentivised. The maximum amount of 2,100 euros per year can lead to a tax refund of almost 1,000 euros. This amount can be used regularly for unscheduled repayments, which shortens the loan term and thus the interest burden. This means that even properties that otherwise offer hardly any tax advantages can generate tax benefits during the term of the loan thanks to the Riester subsidy. The housing subsidy account: Tax aspects An important aspect of using a Riester contract for home ownership is the housing subsidy account. Everything that is subsidised for tax purposes must ultimately be taxed again. The housing subsidy account is a fictitious account in which the subsidised capital is extrapolated at an annual rate of two percent and the amount must be taxed at the end of the savings phase. Tax burden in old age In most cases, the tax burden in old age is significantly lower than during working life. In addition, the tax system is subject to inflation, which further reduces the actual tax burden. The housing development account can also be closed once, with a discount of 30% being granted. Conclusion Riester contracts face considerable challenges, especially in times of low interest rates. Nevertheless, they offer interesting advantages due to the possibility of using them for owner-occupied residential property, especially for high earners. Tax incentives for amortisation can shorten the loan term and generate tax benefits during the term of the loan. Although the housing subsidy account must be taxed, the actual tax burden in old age is often lower than the tax benefits during working life. Overall, it is worth considering the use of a Riester contract in connection with home ownership in order to maximise the benefits.
Tax Loss Carryforward: A Guide for Students The tax loss carryforward is a tax tool that can be particularly useful for students who incur expenses during their studies but have little to no income. It allows you to claim study-related expenses as tax-deductible losses and carry them forward to future years when you start earning income. In this article, I will explain what the tax loss carryforward is, who can benefit from it, and how you can use it in practice—with an example. What is a Tax Loss Carryforward? The tax loss carryforward allows you to carry losses from one tax year into future years. Losses occur when your expenses exceed your income. For students, common expenses include: - Tuition fees - Books and study materials - Transportation costs - Equipment like laptops or software These costs typically arise during your studies, but your income is often low or nonexistent. With the loss carryforward, you can "save" these study costs and apply them against future earnings when you start working, reducing your taxable income. Who Can Benefit from the Tax Loss Carryforward? The tax loss carryforward is especially relevant for students in a second degree program (e.g., a master’s degree) or professional training. In these cases, the expenses are considered "work-related expenses" (Werbungskosten in German), which can be carried forward indefinitely. In contrast, expenses for a first degree are usually categorized as "special expenses" (Sonderausgaben) with a deduction limit of 6,000 euros per year. Additionally, special expenses cannot be carried forward to future years. How Does the Tax Loss Carryforward Work? If your study-related expenses exceed your income during your studies, you can claim these losses in your tax return. The tax office "stores" these losses as a carryforward and automatically applies them against your taxable income in later years when you start earning, leading to tax savings. Step-by-Step Guide: How to Use the Tax Loss Carryforward 1. File a Tax Return: Even if you have little or no income during your studies, you should still file a tax return. You can use the free software "Elster" or other tax programs to do this. 2. List Work-Related Expenses: Enter all study-related costs in the tax return under "work-related expenses" (Anlage N). These may include tuition fees, textbooks, transportation to university, and work equipment like a laptop. 3. No Income? No Problem!: If you have little or no income, your expenses will be recorded as a loss and stored as a "loss carryforward." 4. Wait for the Notice: After processing, you will receive a tax assessment notice indicating the amount of your loss carryforward. This amount will be automatically deducted from your taxable income in future years when you start earning. 5. Enjoy the Tax Savings: Once you start working and earning an income, the loss will be deducted from your taxable income, reducing your tax burden. Example: How the Loss Carryforward Works in Practice Anna is a master’s student with annual study expenses of 8,000 euros (e.g., for tuition fees, study materials, and rent for a home office). She earns only 4,000 euros from a part-time job. Since her expenses exceed her income, Anna has a loss of 4,000 euros. The tax office records this loss as a carryforward. Two years later, Anna starts her first job and earns 40,000 euros. The 4,000 euros from her carryforward are then deducted from her income, reducing her taxable income to 36,000 euros, resulting in significant tax savings. Conclusion The tax loss carryforward is an effective way for students to make use of their study-related expenses and benefit in future years. It is particularly advantageous for those in a second degree program or professional training, potentially leading to significant tax savings in the long run. It’s worth keeping track of your expenses during your studies and filing a tax return to take advantage of this opportunity. You want free support? Then request our checklists: contact
Guide: How to Start a Business in Germany for Expats
When does it make sense to switch to private health insurance in Germany?
30 years of statutory health insurance: an overview of the shortage of benefits What has actually been happening in statutory health insurance for over 30 years? As an expat, you often have statutory health insurance right from the start in Germany. Compared to healthcare systems worldwide, the statutory healthcare system in Germany is still one of the best. So membership of the statutory health insurance system feels good at first. Still... Because demographic change will shake up all social systems in Germany. However, this trend has been taking place for over 30 years. Constant increases in contributions and cuts in benefits determine the entire course of statutory health insurance. Here is an excerpt of the development. 2024: Average contribution: 843,53 euros Effective contribution rate: 16,3% Contribution rate for compulsory long-term care insurance (with 1 child): 3,4% 2023: Average additional contribution: 807,98 euros Contribution rate for compulsory long-term care insurance (with 1 child): 3,4% 2022: Average additional contribution: 769,16 euros Effective contribution rate: 15,9% Contribution rate for compulsory long-term care insurance (with 1 child): 3,4% 2020: Average additional contribution: 735,94 euros Effective contribution rate: 15,9% 2019: SHI Insured Persons Relief Act (GKV-VEG) Return to equal funding (employers and employees pay equal shares) Reduction in minimum assessment for voluntarily insured persons to 1,038 euros Average additional contribution: 703,31 euros 2018: Average additional contribution: 690,30 euros Effective contribution rate: 15,6% 2015: SHI Financial Structure and Quality Improvement Act (GKV-FQWG) Reduction of the general contribution rate from 15,5% to 14,6% Introduction of the individual supplementary contribution of 0,9% 2011: Increase in the contribution rate to 15,5% Introduction of the individual, flat-rate additional contribution by the health insurance funds 2007: SHI Competition Reinforcement Act (WSG) Introduction of health fund Compulsory insurance for uninsured persons Uniform federal contribution rate and additional contribution possible 2004: Health Modernization Act (GMG) Introduction of 10 euro practice fee Co-payments for medicines, bandages and medical aids Co-payment in hospital Cancellation of death benefits, glasses and travel costs 1999: Solidarity Strengthening Act Re-introduction of dentures for children and young people Reduction in co-payments for medicines 1997: Contribution Relief and Reorganization Act (NOG) Cancellation of dental prostheses for children and young people (born after 1978) Abolition of subsidy for spectacle frames Reduction in sickness benefit Reduction in subsidy for dentures 1995: Introduction of compulsory long-term care insurance SGB XII with a contribution rate of 1,0%, rising to 1,7% by 2008 These events mark important changes in the German healthcare system over the years, including contribution increases, legislative changes and reforms.
Product check: Base pension Why the base pension makes sense for women in particular The base pension is a private pension scheme with numerous advantages, but also some clear restrictions as framework conditions. It is used exclusively for old-age provision, whereby the contributions paid in after the savings phase are paid out as a lifelong pension until the end of life. Advantages Secure retirement provision Lifelong pension payments High tax advantages Flexible payment options Capital is protected against attachment Flexible investment options without state requirements Disadvantages No early payout No cancellation possible (only contribution deactivation) Taxation in old age Changing provider can be tricky In contrast to the Riester pension and occupational pension schemes, the base pension does not require a mandatory capital guarantee. This means that investors have more freedom in choosing their investment strategy as they are not bound by fixed guarantees. In particular, the option of using the base pension as a purely ETF or unit-linked solution makes it attractive for those who want to invest their capital flexibly and with a focus on returns. The payout from a base pension is then simply higher. A decisive advantage of the base pension is the 100% deductibility of contributions, which has been possible since 2023 for maximum contributions of up to 27.566 € for single persons or 55.132 € for jointly assessed persons. This tax relief makes the base pension an attractive instrument for tax optimisation and for increasing your own level of provision in old age. Another aspect that distinguishes the base pension from other pension models is that it is paid out exclusively as a lifelong annuity. This means that investors receive a predictable and reliable income in old age that is not dependent on market fluctuations or other external factors. The base pension is an ideal pension module, especially for women, who can benefit from their longer life expectancy. For high earners and the self-employed in particular, the base pension should be one building block (out of a total of three) for retirement provision. When making a selection, attention should be paid to a lean cost structure, flexibility and height of payments. Our recommandations: SwissLife Continentale Condor Universa
Tax classes in Germany: a guide Choosing the right tax class in Germany is important for financial planning. Germany has six different tax classes, each designed for specific life situations and family constellations. Here is a comprehensive overview of the German tax classes and what they mean: Tax class I For: Single, divorced, widowed Married people who are permanently separated Persons who live in a registered civil partnership and are also separated Special features: Standard tax class for single people without children Highest tax deductions compared to other classes for married couples Tax class II For: Single parents Special features: Tax relief through an additional allowance for single parents Only applies if there is at least one child living in the household who is entitled to child benefit Tax class III For: Married couples or couples living in a registered marriage where one partner earns significantly more than the other The partner with the higher income chooses this class Special features: Lower tax deductions Can be combined with tax class V for the lower-earning partner Advantageous if one partner has little or no income Tax class IV For: Married couples or couples living in a registered civil partnership with similar incomes Special features: Both partners have the same tax class and pay the same tax deductions Favorable for couples with similar salaries Tax class IV with factor For: Married couples or couples living in a registered civil partnership Special features: Calculation of a factor based on the income of both partners The aim is a fairer distribution of the tax burden Avoidance of high additional payments or refunds at the end of the year Tax class V For: Married couples or couples living in a registered civil partnership where one partner has chosen tax class III Special features: Higher tax deductions compared to class III Partner with the lower income chooses this class Makes sense if one partner earns significantly more than the other Tax class VI For: Employees with several jobs or income from different employment relationships Special features: Highest tax deductions Is applied for the second and each additional employment relationship Changing tax classes It can make sense to change tax class in order to optimize your monthly tax burden. It is particularly worthwhile to adjust your tax class in the event of changes in marital status or significant changes in income. married couples can choose between the combinations III/V and IV/IV (with or without factor), depending on what is most favorable for their financial situation. The III/V combination leads to a higher monthly net income, but usually to an additional tax payment. With III/V, the submission of a tax return is also mandatory. Regardless of whether married couples are in III/V or IV/IV or IV/IV + factor, they always end up with the same tax burden with the tax return (additional payment or refund). Tax class and annual wage tax adjustment The choice of tax class not only affects the monthly net income, but also the annual wage tax adjustment. In the annual tax return, any over- or underpayments are corrected by the annual wage tax adjustment. It is therefore important to choose the right tax class, if you want to avoid high additional payments or unexpected refunds. Conclusion German tax classes are designed to reflect different life situations and family constellations. The right choice of tax class can have a significant impact on the monthly tax burden and should be carefully considered. Married couples should regularly check which combination best suits their financial situation, while single parents and employees with multiple jobs should make sure they are in the optimal tax class. An informed decision will help to minimize financial burdens and maximize net income.