New credit directive to affect German lending to foreigners, others
One factor which may influence the seemingly unstoppable price rises of German housing, particularly in the larger cities, has been understated in most local housing market analyses. Yet it may be about to play a bigger role than anticipated, particularly in hot markets like Berlin.
On 21 March 2016, the German implementation of the European Directive On Credit Agreements for Consumers Relating to Residential Immovable Property (Consumer Credit Directive) came into effect.
The new law imposes stricter conditions on lending to private residential buyers. The core of the new legislation is that the banks have to examine their borrowers’ creditworthiness more carefully than before.
However, the law contains some conditions that make it difficult for borrowers from EU countries other than Germany to get a loan for the acquisition of residential properties in Germany. According to Uwe Bottermann, lawyer and founding partner at Bottermann Khorrami LLP, a Berlin-based law firm specialized in advising foreign buyers of German real estate, “This applies to private buyers from EU countries that are not part of the Euro zone such as the UK, Poland, Sweden, the Czech Republic and Denmark."
In the past, these buyers would have little enough difficulty in securing a Euro loan from a German bank. However, the Consumer Credit Directive intends to protect those buyers from currency fluctuations. According to the new law, 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. This is obviously extemely unwieldy.
As Bottermann says, “From the bank’s perspective, this constitutes a significant financial risk. No German bank wants unforeseen foreign currency loans on its books.” Consequently, the bank would have to hedge the currency risk itself. "It is not difficult to predict the banks’ reaction - they will stop providing EU-borrowers from non-euro countries with loans.“
In practice, this means investors from countries such as the UK, Sweden, Denmark, the Czech Republic or Poland intending to buy residential properties in Germany will need to find alternatives - not too easy since obtaining loans from a bank from their respective home countries is increasingly difficult since the financial crisis.
"Creating a GmbH (Limited Company) in Germany to hold the property (and the loan) could be a work-around solution. While this causes some additional costs, German banks might be more amenable to that solution.“
Since the introduction of the European Consumer Credit Directive, mortgage financing banks have been confronted with a range of new responsibilities when faced with the decision to lend or not to lend. Given German bank's propensity to lend against only about 60% of the market value of a property, their risk of heavy losses in lending to consumers is fairly low. Their bigger fear now may be being sued for giving inappropriate advice, should the borrower find himself in difficulties later. The new guidelines make the bank culpable of misselling if they are deemed to have not done their job properly, and this will have them running scared.
As across the EU, the new directives are putting a heavier onus on bank lenders to satisfy themselves that borrowers will remain solvent for the lifetime of the loan (an impossible task at the best of times).
The first feedback from the market seems to suggest that the main effect of all this is to make the lending decision process much longer, rather than that banks are rejecting large numbers of loan applications, according to mortgage broker Interhyp.
The directive is likely to affect other groups, such as pensioners, who might like to borrow €50,000 to make improvements to a house that has paid off its mortgage, but are rejected because of the preference by German banks for mortgages to be repaid once the borrower reaches pension age, and for the property to be unencumbered.