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My partner and I are looking to buy at the moment. I won't get into all the details but we live in Germany, have a budget in mind and have talked with a few brokers and providers.

Our idea for the monthly repayment budget comes from what we pay in rent now as well as what we'd pay if we rented a property in a similar bracket to the ones we're trying to buy. And, of course, what we think is fair for the market.

We've had various estimates for mortgage offers and many are offering more than our initial budget idea so my question is is it better to take a higher mortgage for a more 'desirable' property and pay more per month if you can afford it or to be conservative and take a lower mortgage. We're currently finding the prices are a higher than we planned.

I realise it's subjective regarding risk etc but any input on pros and cons or going closer to your financial limits (within reason) with your mortgage payments would be greatly appreciated.

EDIT: I added a little more context to a comment on an answer that might be useful extra information:

We're buying in Berlin, Germany that has had record rises in both rent and purchase prices in recent years. Seems set to continue. Interest rates are at near record lows and I've consistently had offers of around 1.5% for 15-20 year fixed rate deals. We've been advised to lock in current rates for as long as possible, especially as there is talk of a rate rise here next year. Additionally, I have been offered options for a type of income insurance for the payments. So current numbers would have us spending 25% of net income per month.

  • What would happened to your rates if you would pay for 3 years 1/8 less than you pay for rent but after every years push those saved money into paying of bigger chunk of debt? – SZCZERZO KŁY Sep 3 '18 at 14:06
  • "seems set to continue"... Rapid rises in home prices in prior years, assuming that would continue indefinitely, and taking advantage of unusually easy-to-access money, is exactly what tanked the US economy in 2007-9 and put a whole lot of people into foreclosure and credit damage. The US social safety net is maybe not as good as Germany's and wealth equality is much worse, but most affected Americans have not recovered. – Harper - Reinstate Monica Sep 3 '18 at 16:49
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    See this recent question, which is not a dupe, but contains relevant information: money.stackexchange.com/questions/99346/is-a-house-an-asset – henning Sep 3 '18 at 18:28
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    @Harper I think the rapid rises, in Berlin at least, are mainly down to a kind of artificial market created due to its recent history and its sudden reemergence as a global city that people what to move to. Seems to just be catching up to other German cities where prices are already higher, so hopefully not something to take down the economy. – the_pgb Sep 4 '18 at 14:42
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Two main questions you need to consider:

1. Interest rates

What are interest rates like in Germany right now? You need to be comfortable with the payments at the current rate and also at potentially up to as high as 15%. As a VERY rough rule of thumb, every 1% on the interest rate means an extra $100 / month / $100k borrowed (using $ as a "generic currency" symbol). Even if you get a fixed rate product for 5 years, will you be able to afford the new deals available at the time that product expires?

2. House prices

Where are house prices in your area at the moment and what is the expected trend? You do not want to be stuck with negative equity (owing more than the property is worth) if prices falls as that makes it very very hard to move should you need to.

Also be aware that what the banks will lend you is not necessarily the same as what it is sensible to borrow - the global financial crisis in 2007/8 taught us that. Since then the banks are better about affordability checks etc. but you should still do your own "what if" forecasting - what if you lose your job, suffer a life-changing accident or illness, have a child, etc. and make sure you are comfortable with the outcomes, or have a backup plan (insurance policy etc.) in place.

NerdWallet has a good calculator which classifies amounts as "affordable", "stretching", or "aggressive", you can decide which of those you are comfortable with.

Finally, also don't forget to include home buying fees (solicitors, surveys, taxes, etc.) in your calculations.

  • Hi Vicky, thank you for the response. So some more detail. We're buying in Berlin, Germany that has had record rises in both rent and purchase prices in recent years. Seems set to continue. Interest rates are at near record lows and I've consistently had offers of around 1.5% for 15-20 year fixed rate deals. We've been advised to lock in current rates for as long as possible, especially as there is talk of a rate rise here next year. Additionally, I have been offered options for a type of income insurance for the payments. So current numbers would have us spending 25% of net income per month. – the_pgb Sep 3 '18 at 12:38
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    @the_pgb The way you choose between fixed and variable rates should not be based on whether you expect rates to rise (and when people say otherwise it is a good tell they are not a good advisor to you). If you economy is such that you can afford interest rates to vary a lot and you prefer taking that risk (on average saving money) compared to not by having it fixed, you should. For me it sounds like locking the interest rate is a no-brainer for you. – Henrik Sep 3 '18 at 14:54
  • Nerdwallet's calculator includes only US cities. – Federico Poloni Sep 3 '18 at 16:14
  • @Henrik I think it's a good move to lock the interest yes, impossible to tell exactly what will happen but we would be comfortable paying current levels and from all I've read, the current levels are exceptional – the_pgb Sep 4 '18 at 14:54
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The real question that only you can answer is why you consider exceeding your budget.

You write that your budget is based on what it would cost to rent that kind of property and that "the prices are a higher than we planned". That sounds like a real estate market where it simply makes more sense to rent than to buy, from a financial point of view. Now if you personally place a great value on owning the real estate you live in, and you have to increase your budget to be able to afford the kind if real estate you want, that is a valid reason.

On the other hand, if you would be happy living in something that is within your budget, there are two typical reasons to increase it:

  • You think that a "more desirable" property would be a good investment, i.e. would increase in value more than whatever else you could invest in. This is unlikely to work out if you're already looking at a real estate market with low rental incomes, and in any case not good for diversification.
  • You think you should buy a "better" house simply because you can afford it at the moment. This is called "lifestyle inflation" and is just generally a bad idea.
  • Hi Micheal, thanks for the response. Here in Berlin, the rental market is very attractive, good rights etc but the prices are going up rapidly. We would need to move (an extra room) in the next couple of years anyway so hence the buying idea. Plus I'm from the UK and we always prefer to buy our houses :) and I would prefer to pay towards an asset I could own rather than pay to a landlord if possible. To put the budget into perspective we aimed for 25% net monthly income so we're lucky enough to have room to increase to a point that wouldn't break the bank. Maybe 25 is just too optimistic. – the_pgb Sep 3 '18 at 12:54
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This is one question that I’m not sure country matters. I’m in the US and my answer should apply to you.

I’d recommend buying the size house that you need. The larger house comes with taxes, maintenance, the cost of heating/cooling, and cleaning. Instead of reaching for the largest house the bank says you can afford, get the smallest house you can tolerate. That will give you time to start a family, and see how much space you really need to live in. You can also get a far shorter mortgage, and likely have it paid off 10-12 year later. At that point, it would be easier to upsize if you really need another bedroom or two, compared to downsizing, if by the same time you were in a too-big house.

  • Hi JoeTaxpayer, thanks for the reply. I think a few factors play in and it would be partially size but the big price difference come more with location and an extra room. I think "tolerate" is the apt word, we have to be happy with our purchase and I think maybe we're being too optimistic about what we can get for our money. Is there a difference between focussing on your monthly budget OR the final price? The final price is a bit of an abstract number for me right now and I'm not really thinking about being mortgage free just yet, more rising rents and investing my money into something. – the_pgb Sep 3 '18 at 13:44
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    Well, you can look at your budget, and work backwards. i.e. pull out insurance taxes, etc, and see what’s left for mortgage payment. Then turn that into the gross amount you can borrow. This results in the maximum number, and leaves little wiggle room. – JTP - Apologise to Monica Sep 3 '18 at 14:09
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Normally, borrowing money is a bad idea because most loans are designed to be profitable for the lender. Financially, the borrower generally is at a disadvantage. Borrowing for consumer goods like living space, cars, furniture, jewelry, etc, is especially bad in most cases.

However, you say you have lenders offering a borrowing rate of 1.5% which is so low that, in my opinion, it is favorable for the borrower. If you can truly get this rate (and that includes all fees), then borrowing the money to buy real estate is probably a good idea as long as the real estate is a reasonable piece of property (in a good area, with no obvious problems like easements or restrictions, etc).

Loans impose a psychological burden on the borrower. You are no longer mentally free after you undertake a loan, but if you can get 1.5% and do not mind being a slave to a loan for 20 years, it could be financially beneficial.

  • I think the psychological point is a good one. If only there was an equation to give it a monetary value so I could properly weigh it all up! With a pretty safe rental market here, it's finding the amount of benefit in buying is something here I'm struggling with. If it came to compromising on a house to be able to afford to buy right now plus the psychological burden, I think that's enough to keep me renting. – the_pgb Sep 7 '18 at 15:08
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The only reason I can think of to really stretch yourself on something like this is if inflation is really high, well above the mortgage rate. In that situation you would expect your income growth to outpace the mortgage payments. This would also suggest that the value of the home would increase. I see something about 16% taxes. That seems insanely high if that's annual so I'm guessing that maybe that's a one-time sales tax or this doesn't work the same way as property taxes typically do in the US. If you have to pay 16% per year on the current value of the home, I can't see how prices could continue to rise beyond income levels.

I would not buy more home that you need simply because housing prices are going up. Even if they do, what's your exit strategy? If you sell it and buy another home, that one is going to be expensive too. And you likely will not get such a great interest rate. You really can't cash in on a major increase in your home value unless you downsize significantly, get out of the housing market or move somewhere else more affordable.

  • The 16% is basically a lump sum you pay made up of tax, notary fees and about 7.14% commission to an agent (not sure what they do to deserve that amount but anyway!). That commission can be avoided if you buy a new build, it those are in high demand and rare at the moment. I worked out that the cost of just fees alone on the apartments we’re looking at would pay our current rent for 5.5 years! So that was a little sobering. The market is designed for long term investment here, fees mean you can’t move easily. – the_pgb Sep 6 '18 at 7:43
  • @the_pgb Can you finance these fees or do you have to pay them with cash? – JimmyJames Sep 6 '18 at 14:41
  • they are financed. Basically built in to your mortgage offer therefore, in effect, added to the cost of the house. I believe there are also taxes for selling with in 10 years here but I haven’t got too far in to all that. – the_pgb Sep 6 '18 at 14:53
  • Not to diverge too much into economics but these taxes essentially reduce the value of all homes in the area across the board. By that, I mean that if the tax were suddenly abolished, the values of homes would quickly rise by a similar amount. The reason should be intuitive as you work through what you can afford: it's based on the total monthly (?) payment. If you didn't have this as part of the payment you could afford more and so could everyone else. The point is that if are determined to live in Berlin, don't sweat it too much. The main outcome is that it reduces any gains you might have. – JimmyJames Sep 6 '18 at 15:08
  • Yeah, I see that everyone pays so it's just part of the market. I think it just 'feels' strange. Many Germans opt to build their own house when they decide to settle down so avoid some of these fees and taxes. However, this isn't really an option in the city proper. – the_pgb Sep 7 '18 at 15:11
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You should buy a home you will be happy in.

I've only heard of this theory of getting the highest mortgage you can afford coming into play if you are young. The thought is that your salary should increase over the next few years so your debt to income ratio will decrease. Buying the most expensive home you can afford now will prevent you from moving within the next couple of years to a bigger home like you would be inclined to if you got a small home. Just the process of getting a home will cost you upfront money you will not get back(moving costs, origination fees). So the more times you move the worst off you will be.

How much you are willing to pay for a home should be dependent on the age of the home, things that need to be fixed or soon will need to be fixed, neighborhood, taxes, and a realistic guess of any large purchases you will make in the coming years(cars, pool installed, kids). Also, you will have to keep a reserved amount each month for upkeep of the home(light bulbs, lawn care equipment, etc.).

You should not compare your rent to a mortgage payment. Every time you pay rent you only get some credit and a place to live. With a mortgage payment, some of the money is going principal. That is putting money towards something you can later get a return on.

Side note: If your debt to income is low, make sure to invest that extra money. You can consider a mortgage an investment if the house will be worth more than what you paid for it when you sell it. All investments have risks, but sitting money depreciates with inflation so doing nothing with money means you are losing money.

  • I think the taxes and fees are the biggest worries for me here in Germany. It can add up to about 16% of the property's total value in Berlin so there's a lot of debt built in before you even start to pay for the house itself. The majority of people rent here and I'm concerned that's for very good reasons that might not be linked to being able to afford to buy. More like there's no benefit, or perhaps even a cost. – the_pgb Sep 5 '18 at 9:14
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I'm currently in the process of buying a house and would recommend against taking a mortgage that's much higher than the rental rate you're paying now.

You've addressed the principal and interest aspects of a home mortgage, but one key difference between renting and owning is maintenance. It's 100% on you when you own.

For my personal situation, that includes spending some money right after closing to get the house move-in ready (there's some projects we want to do that are easiest without a bunch of stuff on the floors), planning for replacement of some major appliances in the next 5 years, maintaining the lawn area, plus unexpected issues. Furthermore, we are talking about some upgrades we might want to do in the next 5-10 years, which would need to start being saved for. Anyways, all those costs are above and beyond your monthly mortgage payment, so it's definitely helpful to have reserves.

  • This is something that we have to consider as we’d be buying an apartment and therefore in to the building. If the building needs maintenance we have to pay our share, and do it on schedule along with the rest of the owners. – the_pgb Sep 6 '18 at 14:58
  • I'm unsure how things work in Germany, but those costs should be amortized over time via things like homeowner association (HOA) dues. If the HOA is not very good at budgeting or planning, though, you could get hit with a sudden large assessments to deal with unexpected issues. For example, were they to neglect the roof and there was a sudden, partial collapse, the HOA might end up in a deficit of a several thousand dollars that they pass on to the members. – Pyrotechnical Sep 6 '18 at 15:58
  • Yes, I think it's the same here. Some money you pay monthly goes into a fund which can be drawn upon if repairs etc are needed, with only bigger unexpected pieces of work needing the extra input. – the_pgb Sep 7 '18 at 15:15
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From my experience banks will crunch numbers and come back with what they believe you can afford at the time. "AT THE TIME" being key here. This does not mean that you should go with that. It just gives you an idea of what the bank feels your buying power is. As others have mentioned you will want to take into consideration the "what ifs" but there will always be "what ifs." Don't let it be a stopper in what you want. Just keep it in mind as you move forward and plan accordingly. Many things will be a bit vague and blurry with the numbers but the numbers from the banks are usually on the high end on the monthly mortgage for the reason that you can shop for some on your own and get them for less (home insurance being one).

Also note that locking in an interest rate should NOT cost you anything. A bank will generally lock in the interest rate upon the initial completion and acceptance of the pre-approval process. If a bank wants to charge to lock you in, look elsewhere. Lot's of lenders. Go with the one that you feel most comfortable with and listens. Interest rate should be locked in for a certain period of time (90, 120, 180 days, etc) at which rate it'll restart at the current.

Buying property is both exciting and stressful. Stress can be negated some if you have all your finances figured before hand. It can be stressful trying to find the ideal place which you never will. Keep in mind that you can and will make the place yours. Color is cosmetic so if you find a house you like but the rooms are painted purple with orange dots look beyond what it is and look at what it could be. Layout is very important unless you are handy enough or have the means to hire to remove/add walls, etc. Go into the rooms and imagine how you would use it. Walk the paths. You are generally in a house for a short time when looking and are expected to make a decision about living in it for possibly a long time. Spend the time and slow down when looking around. Spend the most time walking around and looking in the areas you use the most (generally kitchen, toilet and bathroom) and those that are important to each other. Also, pay attention to what is outside the place. Are there apartments going up across the street or is a new freeway going to be built behind your place. Always recall the realtors motto "Location, location location" when looking.

Size of a place is also important. You don't want overly large beyond your usage and you don't want so small you are wishing you had a gone larger. Go as large as you are comfortable with. Having a spare room is great. More storage is fantastic. Having to have guests or an office in the living room not fun. Having to cram everything into a closet or two is not good. Get the space while you can.

One thing I have done in the years of buying and selling is I ask myself if this is the place I want to stay or is it going to be a stepping stone to the place I want to be. If a stepping stone go into with the mindset that it is an investment and I want the most money in my pocket and not to the bank. If not then you make it what you really want and not what some else may want and possibly consider a shorter mortgage. You can always refinance at a later time if things change.

Overall, I say enjoy the ride and experience. Sorry for running off topic a bit.

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