To rent or to buy in Germany: Which option is right for you?
Are you wondering if buying a home in Germany makes sense for you? In a country where so many people rent their whole lives, and one where you may not be certain how long you intend to stay, it's a question that merits some thought.
Why buying can be the right option
It often does make sense to buy a house in Germany, especially if you plan to stay for several years. The reason is that interest rates for buying a home are very attractive, and you won’t pay capital gains tax when you sell the property, which is almost unique in the world.
If you hold the property long enough, it is an option that gives you more choices as to where to live, and it will help you build wealth to create a safer financial future. Even if you don't know how long you will stay in Germany, it can still be attractive, because it is very easy to rent out properties.
But does it make sense for you, given where rents are and in light of the property price trends? Take the first step toward clarity - use Hypofriend’s free Rent-or-Buy Calculator to explore what’s best for you.
How to make the decision?
Germany is a renters country. Many people rent because they don’t have the savings to pay the purchase fees.
Moreover, they often feel that they need to have a considerable extra down-payment, which is not optimal in practice. As a result, Germany has one of the lowest homeownership rates in Europe.
From an outsider's perspective, buying property in Germany is actually attractive compared to renting. Interest rates are low, and you can benefit from not paying any capital gains taxes when you sell the property after a minimum holding period. This period is just two to three years if you occupy it yourself, and 10 years if you rent it out. If you hold other assets like ETFs, you must pay capital gains taxes.
Taken together, this means that buying is attractive if you own the property long enough.
Calculating whether it's right for you
By using the Hypofriend Rent-or-Buy calculator, you can see the break-even period.
In the break-even graph, you’ll notice that owning a home can grow your wealth increasingly quickly over time. As your mortgage balance decreases, you’ll pay less in interest, while benefiting ever more from rising property values.
Meanwhile, rent increases keep coming every year and so gradually cost you more and more if you continue to rent.
Renting out your property
To harvest the gains of long-term ownership, you can also rent out your property if you decide to move. Many Germans are landlords. They benefit from the special feature that allows them to write off part of the build-up value from their taxable income. For example, if 80 percent of the house price is the built-up value, and you can depreciate 2 percent per year, this gives you a tax deduction of 1,6 percent of the house value.
Indeed, this too is quite unique in the world, making returns on rental properties attractive. Good payment ethics of renters and laws that allow for market-conform rent increases also make renting out relatively attractive in Germany.
Rent and property price trends
This brings us to the other key considerations that impact whether renting or buying is more attractive: the trends in property prices and rents.
In general, rents in Germany tend to rise by about 3-4 percent annually, which is faster than inflation. Property values are appreciating at a similar pace. Prices have come down recently, but they are showing an upward trend again.
You can adjust the assumptions in Hypofriend's Rent-or-Buy calculator. With current interest rates and the above assumptions for rental changes and property prices, most people will start to break-even in as little as two to four years.
What if you have an attractive rent now?
If you currently have a very affordable rental arrangement, buying a property for you might make little sense. However, purchasing a property as an investment can be worthwhile as it builds wealth over time.
Emotional decision
Ultimately, buying a home in Germany isn’t just a financial decision - it’s an emotional one, too. Would you like to have the ability to alter your home, the safety of not being able to be kicked out and the idea of having your own nest that is, at the same time, a nest egg?
The Rent-or-Buy calculator can help you understand your financial situation in each scenario, but the final decision is also about your preferences.
Explore your options
In Germany, renting is quite common due to the high upfront costs of purchasing a home and the savings required. However, purchasing is attractive in the longer term, as interest rates are among the lowest in the world, and there is no capital gains tax. Thus, it is an excellent wealth builder while also allowing you to enjoy your own home. It can be a great choice if you have the basic savings.
If you want to explore your options, use the “How much house you can afford” calculator to see what’s possible and the Rent-or-Buy calculator to find out if it is worth it for you. Check now whether buying or renting is the better option for you.
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