Buying property abroad: the guide for German buyers

Financing from Germany: three viable routes

Probably the most demanding part of buying a property abroad is the financing. German banks rarely grant loans for property abroad directly, since they cannot register any reliable security in the target country. In practice, three routes have become established. First, financing through a bank in the target country: it knows the market, but often requires 30 to 50 percent equity and higher interest rates from foreigners. Second, an internationally active bank that works across borders. And third – the most common route in Germany – a loan secured against German equity, backed by an existing property in Germany. This way you secure German terms and a pure euro loan with no exchange-rate risk.

Outside the eurozone – for example in Switzerland, the United Kingdom or Scandinavia – always keep an eye on the currency risk: an unfavourable exchange rate can shift your calculation noticeably over the term. Also clarify whether special taxes or restrictions for foreign buyers exist in the target country.

Plan incidental and follow-up costs realistically

The incidental purchase costs abroad are often higher than in Germany. In Spain, real estate transfer tax (Grunderwerbsteuer), notary, land register and lawyer add up to about 10 to 13 percent, in Italy to 9 to 16 percent depending on buyer status, in Portugal to around 7 to 10 percent of the purchase price. Therefore calculate a flat 10 to 15 percent buffer beyond the pure purchase price. Added to this are ongoing costs: local property tax, building and liability insurance, administration, maintenance and – for a holiday rental – cleaning and property management.

Tax questions: double taxation agreements and the progression proviso

Rental and sale income from a property abroad is, as a rule, subject to taxation in the country of the property. Germany includes this income via the double taxation agreements – for many countries via the so-called progression proviso (Progressionsvorbehalt). That means: the foreign income often remains tax-free in Germany, but raises your personal tax rate on your remaining income. Exactly how your setup is treated depends on the respective agreement. An overview of the applicable agreements is published by the German Federal Ministry of Finance. In any case, engage advice specialised in international tax law.

Recognising and securing against risks early

Foreign legal systems, language barriers and opaque ownership situations are among the greatest dangers when buying property abroad. Time and again, illegal buildings without a valid building permit or plots with unresolved encumbrances come to light. Therefore consistently engage an independent, locally knowledgeable lawyer – never the seller's –, have the land register and all permits checked, and do not sign any preliminary contract without legal clearance. The German Federal Foreign Office also provides country informationon many countries, which offers an initial overview of the legal framework.

Alternative: building legally secure in the DACH area

Anyone seeking the sun in the south often dreams of a property abroad – and thereby underestimates the legal, tax and language hurdles. For many investors, a new build in Germany, Austria or Switzerland is the lower-risk choice: legally secure, easy to finance, precisely plannable and with no exchange-rate risk. A winterproof holiday home as an investment in a German coastal or Alpine region promises stable demand with calculable effort. Anyone who values full control over the floor plan and energy standard finds an attractive alternative to a property abroad with a timber house or a classic prefabricated house.