Adapt the financing to your project, not the other way round

The best financing is the one that fits your life. The lowest interest rate alone does not decide that. Instalment and fixed-interest period should be guided by your plans rather than by an off-the-shelf product.

Clarify the goal first

Do you want to be debt-free in ten years, are you planning to grow your family or change jobs? Questions like these determine which instalment is affordable and how much flexibility you need.

Determining the affordable instalment honestly

The starting point of every good mortgage is an honest household budget. List all fixed income and expenses and realistically add the costs of the property, i.e. in addition to the loan instalment also running costs, reserves for maintenance and, for a house, property tax and insurance. As a rule of thumb, the loan instalment should not permanently exceed around 35 percent of the household’s net income.

The following overview shows what this means for the loan you could take out. A borrowing rate of 3.5 percent and an initial repayment of 2 percent are assumed; the figures are rounded.

Together with your equity, this gives you your realistic purchase budget. Knowing this figure before the property search saves disappointment and makes you a serious buyer at viewings who can act quickly.

Life stages change the financing

The same property can require a completely different mortgage depending on your life situation. A young couple with rising salaries can cope with a tighter instalment at first and increase the repayment later. A family on parental leave tends to need a lower instalment with the option to increase later. Anyone approaching retirement should have largely paid off the remaining debt by the time they retire, because the instalment then has to be met from pension income. And self-employed people with fluctuating income benefit particularly from generous unscheduled repayment rights, with which good years flow directly into paying off debt.

Room for change

Life rarely goes as planned. A good mortgage has buffers and adjustment options built in so that a new chapter in life does not become a financial problem.

In practice this means: unscheduled repayment rights of usually 5 percent per year, the option to change the repayment rate during the term, and an instalment that does not immediately become a burden even in the event of a temporary loss of salary. Such components cost little or nothing at many banks, but they must be agreed at the time of signing. They can hardly be added to the contract afterwards.

Where off-the-shelf offers fail

Standard offers calculate with standard assumptions, such as a repayment of 2 percent and the maximum fixed-interest period at the best headline rate. Your planned parental leave, the savings plan maturing in four years or the wish to be debt-free by your 60th birthday do not feature in them. But it is exactly these details that decide whether the financing still fits in ten years. That is why our advice starts with your project and ends with the right structure, never the other way round.

Two components instead of one large loan

Your financing does not have to consist of a single loan. It is often smarter to spread the amount over two components, for example a large component with a long fixed-interest period for basic security and a smaller one with a short fixed-interest period that is repaid quickly or waits for a foreseeable inflow of money. Anyone expecting a maturing savings plan or a bonus payment in four years can tailor the small component precisely to that and save on expensive special rights in the main loan. KfW subsidised loans also fit into this structure as a separate component. The price of flexibility is a little more administrative effort, because each component has its own terms and dates that have to fit together. We structure it so that the components interlock.

Stress-testing the instalment

Before you sign, the planned instalment should pass two simple tests. First, the everyday test: actually set aside the difference between today’s rent and the future instalment for a few months and observe whether the household budget stays relaxed. Second, the future test: work out whether the instalment would still be affordable with a temporarily lower income, for example during parental leave or a job change. Bank statements and ten minutes of honesty are enough for both tests. If the financing passes both, it is robust enough for real life.

Questions we clarify in the consultation

The consultation starts with your plans, not product names. How secure is your income, what larger expenses are coming up in the next few years, when do you want to be debt-free and how much of an instalment still feels fine on a bad day? The answers give us the right structure of instalment and fixed-interest period including the necessary leeway, and only then do we look for the bank that delivers this structure at the best price. And if your life changes later, we adjust the financing together, for example at the next fixed-interest period or with a well-planned unscheduled repayment.