Mortgage interest (Hypothekenzinsen) is the cost of borrowing money to purchase property. For investment properties in Germany, it's fully tax-deductible—turning it into one of your most valuable deductions.
How Interest Works
When you take a mortgage, your monthly payment consists of:
- Interest (Zinsen): Payment to the bank for lending you money (tax-deductible)
- Principal (Tilgung): Paying down the loan balance (not deductible, but builds equity)
Real Example: Interest Over Time
€405,000 Loan at 4.4% Interest, 1.5% Amortization:
Year 1:
- Annual interest payment:€17,820
- Annual principal payment:€6,075
- Monthly total:€1,994
Tax Impact (42% bracket):
- Interest deduction:€17,820
- Tax savings:€7,484
- Effective interest cost:€10,336 (2.6% effective rate)
Your 4.4% mortgage effectively costs you only 2.6% after tax deduction
Interest vs. Principal Over Time
In early years, most of your payment is interest (which helps with taxes). As you pay down the loan, more goes to principal:
- Year 1: 75% interest, 25% principal
- Year 10: 68% interest, 32% principal
- Year 20: 55% interest, 45% principal
Why Interest Deductibility Is Powerful
The investor's advantage
If you buy a property for personal use (Selbstnutzung), mortgage interest is NOT deductible. But for investment properties, every euro of interest reduces your taxable income. This is why real estate investing is so tax-advantaged in Germany.
Maximizing the Interest Deduction
- Higher leverage = higher deduction: 90% LTV means more interest to deduct
- Longer fixed periods: Lock in deductibility for 15-20 years
- Interest-only loans: Maximum deduction (though rare in Germany)
- Refinance strategically: When rates drop, refinance to maintain interest deductions