High financing hurdles hinder property purchases in Germany
Foreign buyers of German properties do not have it easy, especially when banks are involved. Banks often seem inflexible, and financing frequently fails due to mere formalities. In 2016, the situation worsened with the implementation of the Consumer Credit Directive. There is no simple solution to this problem. However, clear and timely communication with the bank can help.
by Uwe Bottermann, Lawyer and Partner at Bottermann Khorrami LLP
For foreign buyers of German property, the general conditions worsened in 2016. The main reason: it is becoming increasingly difficult to obtain loans from German banks. This can prove fatal for the investment, because without bank financing the investment may not make sense. Private individuals who want to buy single apartments or houses are particularly affected. Large institutional investors can usually solve the problem with appropriate corporate and financial structuring.
Various developments have contributed to this situation. Foreign investors increasingly face bureaucratic hurdles. This development has intensified in recent years with banks imposing more formalities in the verificationand credit approval processes. The identity verification is often the first serious hurdle. Banks are required to verify identity according to the German Anti-Money Laundering Act (Geldwäschegesetz). If the investor is not present in Germany, the banks cannot currently carry out this check. Previously, identification at the German Embassy in the respective home country was sufficient. This is no longer possible. Notary confirmations often fail because of different notary systems. German banks generally do not allow an identification via other banks in the investor’s home country. For foreign investors unfamiliar with such formalities, these obstacles often come unexpected. However, investors must take these issues seriously.
Banks must develop new solutions
It would be in the banks’ best interests to develop solutions to this issue. The introduction of video identification springs to mind. In reality, however, the banks are shying away from new approaches and thus from doing business with foreigners, citing regulatory limitations as the reason. Instead, foreign borrowers need to fulfil a combination of requirements; each of which can be a deal breaker. In addition to the identification, other formalities can be high hurdles for foreigners; for example, the requirement that they must have a domestic (German) address for service of documents by mail. On the substantive end banks often proceed too formally or restrictively, specifically when checking the creditworthiness of the borrower. For example, a foreign entrepreneur who wanted to buy a property in a German A-location for his own use failed to receive a loan, despite having good credit and the property being high value. The bank’s explanation: the property would not generate sufficient cash flow to cover the loan repayments as per the bank’s internal guidelines. The real reason may have been that the extensive examination of the prospective customer was simply too complex and difficult for the credit department of the bank.
This rigid attitude of the German banks rightly seems incomprehensible to many foreign investors. However, the reasons seem to be organisational in nature: comprehensive legal obligations (such as the Anti-Money Laundering Act), compliance requirements and banking regulations appear to warrant complex structures that are averse to flexibility.
Consumer Credit Directive poses problems for private buyers from Poland, Sweden, the Czech Republic and Denmark
Another obstacle to bank financing for foreign buyers is the German implementation of the European Directive On Credit Agreements for Consumers Relating to Residential Immovable Property (Consumer Credit Directive) which came into effect on 21 March 2016. The core of the new legislation is that the banks have to examine their borrowers’ creditworthiness more carefully than before.
While this appears to be good news for consumer protection, the law contains some conditions that make it difficult for borrowers from EU countries to get a loan for their property purchase in Germany. This applies to private buyers from EU countries that are not part of the Euro zone such as Poland, Sweden, the Czech Republic and Denmark. To date, these buyers would relatively simply receive a Euro loan from a German bank.
Enter the Consumer Credit Directive: it intends to protect those buyers from currency fluctuations. The borrower can request the bank to convert the loan into the respective home currency if the exchange rate between loan currency (i.e. Euro) and home currency shifts by more than 20 percent to the borrower’s disadvantage. For the banks, this is an incalculable risk. They do not want foreign currency loans on their books. This would mean that they have to secure the exchange rate risk themselves. The reaction of the banks is predictable: they are no longer granting mortgage loans to private EU borrowers from Non-Euro countries.
Brexit complicates the situation further
The result of the Brexit-Referendum has complicated the situation yet again. If the UK is no longer a member of the EU, the Consumer Credit Directive would no longer apply to Britons. They would therefore be eligible to obtain loans again. However, the UK is currently still an EU member and will remain legally so until the end of the exit negotiations. Exactly when the exit from the EU will be is currently unforeseeable. The uncertainty in the coming years will likely lead to British private buyers staying away from the German market.
Clear, timely and detailed communication with the bank helps
Foreign investors currently in need of a German bank loan for a property should be aware from the outset that not everything operates the same as in their home country. They should address important issues early on with the bank and take all requests from the bank seriously – however trivial they may seem. An approach along the lines of „this will work out somehow“ can easily lead to a seemingly trivial formality ultimately becoming a deal breaker.
Katharina-Heinroth-Ufer 1, 10787 Berlin, Tel: 030 240 899 - 444, office@bk-law.de, www.bk-law.de