New lending laws hinder access to German borrowing for many
Savings banks (Sparkassen) across Germany are reporting sharply lowered mortgage lending to consumers since the introduction of tighter new lending legislation which came into effect on March 21st this year. The new regulations, stemming from the Consumer Protection division of the EU, have significantly raised the barriers for consumers to qualify for a mortgage loan to buy residential housing. In parts of Germany, mortgage lending has fallen by up to 20%. Resistance is welling up from many banking quarters, with bank representatives complaining that adhering to the letter of the new guidelines is seriously hampering their ability to make legitimate loans to otherwise creditworthy borrowers.
In a nutshell, the new European directives on consumer mortgage lending place a far greater onus on the lending institution to verify the ability of their borrowers to pay over the lifetime of the mortgage – in effect, subjecting them to 'stress tests' way beyond their current life circumstances. More weight is to be given to the degree of advice given to the potential borrower and that borrower's credit risk, rather than to the underlying value of the property to be financed.
Factors such as the borrowers' age and current earning power are to now take greater precedence over the property to be financed than in the past. The accompanying scrutiny of a candidate's credentials now requires far more administration and background verification than previously – along with the threat of draconian penalties for bank advisers for cases which could be construed as "misselling" or providing inappropriate advice.
The motive behind the new stiffer EU regulations is the desire to prevent a potential wave of non-performing consumer loans arising from a bursting property bubble, as a consequence of the lessons learned from the financial crisis.
Given Germany's much more conservative approach to lending against property, many banks and now politicians believe that German legislators have interpreted the EU guidelines much too strictly for German needs when translating the measures into local law.
With interest rates at record lows, but supervisory and compliance charges rising, the falloff in mortgage lending is hurting the savings banks, and despite compensating by higher lending to SME's, the country's 52 Sparkassen will see lower collective profits this year versus last year's €1.75bn. Overall lending rose in the first six months by 4.7% to €116bn, with business and personal lending rising 5% to €54bn, the highest growth in five years.
Anecdotal evidence is mounting that German property loan applicants who are aged 55 or older are having an increasingly difficult time in raising a loan. In an article in the Offenbach Post, (the neighbouring city to Frankfurt), Guido Braun, the CEO of the Sparkasse Offenbach, confirmed that his bank was increasingly being forced to turn down older applicants' loan requests.
"In our opinion, German law has considerably overshot the EU mark in legislating for new residential housing credit guidelines, and we now see this as a real problem", said Braun. His views are being echoed by bank managers in the Rhine-Main region, who see their hands increasingly tied by the new restrictive regulations.
Frankfurt, along with Berlin, has been one of the most popular German cities for foreigners to invest in, and to date the banks have been very approachable when it comes to financing local German residential housing, in markets which they know and understand well. Asians, Arabs, Russians and numerous Europeans and Americans have been buying property in Germany's big international cities – and finding ready financing from Germany's local banks.
There is yet another problem which is putting a dampener on foreigners' access to the German residential market. These willing buyers are now being faced with a big new hurdle to investing in Germany – in addition to the tighter scrutiny they are now, in any event, being subjected to.
According to Hans-Joachim Beck of German property association IVD, "At the moment banks have effectively ceased to lend foreigners money for property investment. The reasons are based on §503 in the BGB, or Germany's Civil Code, which ordains that banks are now obliged to inform consumers who have taken out a loan in a (for them) foreign currency when the value of the (non-borrowed) portion of the purchase price rises by 20%. The borrower then has the right to convert the loan on the asset into his/her own currency. Naturally no bank wants to be exposed to this risk."
This unusual situation has its roots in borrowing and lending practices in several European countries. Countless borrowers in several countries, such as Poland and Austria, financed property purchases in foreign currencies such as Swiss Francs, which charged a lower interest rate. Thousands were caught out when the exchange rate suddenly shifted, leaving them with much higher capital repayments.
The EU subsequently introduced a new law to protect consumers against this (2014/17/EU), but the German legislators again gave it an overly strict interpretation when translating it into German law. The regrettable result is that borrowing by foreigners who don't earn their daily living in Germany has just become much more difficult.
The new German law should not affect foreigners who live and are domiciled in Germany and expect to service the loan from German income or from the surplus rent accruing from the property. However, for non-domiciles, proving that the property is more than paying for itself within purely German context can be admistratively difficult and represents another hurdle to gaining financing.