Living in Berlin: The Benefits of Buying Property in the German Capital
This blog post has been written by Julia Ptock from Hypofriend, Germany's fastest growing independent mortgage advisor. She studied German language and literature in Leipzig and has set her sights on becoming a happy homeowner herself soon.
Berlin is one of the hippest and most liveable cities in the world. But the metropolis is more than just the capital of Germany. It is the special attitude towards life that attracts more and more people, especially young people. The city is growing, which is also because many companies have their headquarters in Berlin and many young professionals come to the city.
But anyone moving to Berlin will quickly notice how tight the housing market is. And how quickly prices have been increasing in the last 5 years. That's why it's not just newcomers who are asking themselves whether they may be better off buying instead of renting.
Buying or renting? A type question
Before you think about whether your financial situation allows you to buy, you should think about whether you see yourself more as a tenant or an owner in the long term. If you find that you would rather be flexible in the future and not invest your money long-term, renting could be the right option for you. If you plan to stay in Germany for at least three years and have a regular income, but pay a high rent, you should definitely think about buying your own apartment.
Advantages of renting
You are flexible in choosing your place of residence. Job-related moves are easier to manage.
Your responsibility for the maintenance and upkeep of the rented property is low. Usually, the owner takes care of it.
As a tenant, you only pay your rent and do not have to take out a loan.
Your utility costs are relatively low.
Advantages of buying
As a homeowner, you have the security of knowing that the apartment or house is yours.
You save rent. With low interest rates, the cost of borrowing is often lower than the rent you would pay.
You can shape your own property according to your wishes. While tenants have to get permission from the landlord for changes in the building, you can decide freely.
Your own property is a good investment that you can live in yourself.
Especially in old age, when income decreases with retirement, housing costs are much lower compared to renting.
Generally, costs tend to remain constant, while rents continue to rise steadily.
Over time, the value of the property increases and so does your wealth.
If you don't want to live in the property yourself, you can also rent it out and generate additional income.
Owning property increases your wealth, renting burns money
In short, owning property is less expensive in the long run. Why? The average rent is 3.6 percent of the property price and can increase by a few percent each year (for example, because of a contractual rent appreciation). Owning real estate costs less in the long term with an interest rate plus maintenance costs of around 1.5 to 2 percent. What's more, owning a home also brings a potentially large increase in value. If you continue to pay rent, on the other hand, your money is gone. To make this clearer, here are a few figures:
Assuming you pay 1,200 euros in rent per month, that means you pay 14,400 euros a year to your landlord. With a rent increase of three percent per year, which is possible with contractual rent appreciation, you will pay 1,236 euros per month in the second year. After five years, your monthly rent will already be 1,351 euros. Calculated over the year, that's 16,212 euros. While your rent increases over time, the monthly mortgage payments remain the same. After amortization of the purchase costs, which is often achieved after two to three years, your assets increase.
Example
Your monthly rent is 1,000 euros. The same property costs 300,000 euros when you buy it. Your rent increases by three percent every year. The value of the property also increases by about three percent each year. Imagine wanting to stay in the property, which is located in Berlin, for ten years.
The result: If you were to buy this property today instead of continuing to rent, your assets would grow by 135,870 euros over the next ten years. The upfront purchase costs for this property are 27,210 euros. Considering the increase in value of the property, the interest charges, the maintenance costs and the savings on rent, you would have already broken even on the costs after two years. With the Hypofriend Rent-or-Buy-Calculator, you can easily and quickly find out whether buying or renting makes more sense to build up your wealth over time.
Real estate prices and additional purchase costs in Berlin
Real estate prices in Berlin have been rising constantly for years. Whereas buyers paid around 1,550 euros for a square meter of existing property at the beginning of 2010, the price was 5,020 euros at the beginning of 2021. That is an increase of 223.87 percent. The picture is similar for new buildings. Buyers paid according to Guthmann Estate ten years ago 2,970 euros per square meter. Now it is 6,790 euros.
At first glance, the development of purchase prices in Berlin is extreme. However, it is important to note that Berlin started from an extremely low level. Other major German cities were considerably more expensive. The median purchase price for an existing property in Munich in 2020 was already over €7,600/m². For new buildings, €8,500/m² was already due.
Anyone wishing to buy an apartment in Berlin should not forget the additional purchase costs. These are, for example, costs for the notary and the land registry office as well as property tax and brokerage fees. Up to December 2020, buyers in Berlin have had to calculate extra costs amounting to 15.14 percent. Thanks to a change in the law on brokerage commission at the end of 2020, this is now only 11.57 percent when buying through a real estate broker, otherwise just 8 percent.
The fees are made up of the following:
Property transfer tax: 6 percent
Notary and land registration: 2 percent
Broker's commission (if the property is brokered by a real estate agent): 3.57 percent
Potential buyers should note that banks rarely finance additional purchase costs. Normally, additional costs have to be paid out of savings. Accordingly, it is important that buyers know exactly what they can afford. Hypofriend has developed a budget calculator for this purpose, which potential buyers can use to determine your financial framework in just a few minutes.
How to find out how much you can afford
To find out what you can afford, you can use the Hypofriend Budget-Calculator. It's designed to help potential buyers calculate their budget in just a few minutes.
When planning your budget for your own property, you should keep the following two rules in mind.
You must be able to pay the monthly instalments on the mortgage with your net income.
You should have enough savings to cover the purchase costs from your own resources.
As a general rule, there are two main multipliers that drive the maximum you can afford, namely, your Loan-to-income (LTI) ratio and your Loan-to-value (LTV) ratio. Your LTI typically follows that you can borrow 100x your monthly net income whereas the maximum LTV is typically 100 percent. Additionally, the higher your income, and the lower the LTI, the higher the LTV. At the same time, the lower the LTV the higher the LTI.
To calculate your net income you must deduct all recurring monthly expenses. This can be money such as alimony, child support, rental income, capital assets and other payments. After you have determined your income, you have to subtract your monthly expenses from it. But be careful: you can exclude your previous rent because it will be omitted if you live in your own property.
Another factor that determines the amount of your mortgage is your age. If your pension is still a long way off, you can set a lower repayment rate. Accordingly, you will pay less each month. If, on the other hand, you only have 20 years until retirement, you should increase the repayment so that you can finish paying off the mortgage before you retire. This will increase your monthly burden and you may be able to afford less.
Ensuring you find the right mortgage for your situation
If you have decided to buy your own home, you should plan your mortgage well. It is important that your personal circumstances and your plans for the future are taken into account. Unfortunately, it is often the case that your bank will rarely advise you on these important topics.
An independent mortgage advisor like Hypofriend will help you find the best mortgage for you and your situation. By aggregating all of the banks in Germany, Hypofriend has access to 750 different lenders. Additionally, the advice is based on deep knowledge from the financial sector. Important financial decisions are presented in a way that is easy to understand and follow. While other brokers only show interest rates and repayment schedules, Hypofriend explains how your decisions influence mortgage rates and how you can optimize your financial situation.