New regulation makes lending to foreign buyers more difficult

Crisis-proof, profitable and, in international comparison, still undervalued – residential property in Germany is a sought-after asset, and not just among domestic buyers. For international buyers in particular, real estate in countries with solid economic data represents an important component in the diversification of their investment assets. However, the outlook for some of Germany's neighbors in the European Union has recently taken a considerable turn for the worse. “Right now, banks have pretty much stopped financing foreign buyers’ real estate investments,” observes Hans-Joachim Beck, head of the tax department at the Immobilienverband Deutschland IVD. This is the result of Germany’s implementation of the European mortgage lending directive (2014/17/EU), which has made it significantly more difficult for real estate buyers from countries outside the eurozone to secure foreign currency loans. “In concrete terms, the problem is the new Section 503 of the German Civil Code (BGB), which requires banks to contact borrowers who have taken out a foreign currency loan when their residual loan increases in value by more than 20 percent. In such a case, the borrower is entitled to have their loan converted into their own home currency. This is a risk that very few banks are prepared to accept.” The regulation applies solely to EU citizens who are resident in non-eurozone countries, for example British, Danish or Swedish citizens.

The regulation overshoots the mark

But let’s start at the very beginning: The EU’s new mortgage lending directive was intended to prevent a repeat of the lax mortgage lending practices seen in the USA in the run up to the 2007 financial crisis. In the years since the crisis, banks have been required to significantly improve their lending advisory services and the quality of their creditworthiness checks. German legislators incorporated the EU directive into German law on March 21, 2016. But the EU directive’s original good intentions have been poorly translated into national law. The new regulation, which was designed to protect consumers, has made it more difficult for families, seniors and some non-eurozone EU citizens to buy property in Germany. “When the mortgage is agreed in a currency that is not the borrower’s own currency, and the borrower is an EU citizen, then the borrower is entitled to request that their mortgage loan be converted into their national currency if the exchange rate moves by more than 20 percent. Any conversion of the loan amount into the borrower’s home currency has to be carried out at the exchange rate on the day the borrower’s request is made, unless the loan contract specifically contains an alternative provision,” explained Beck. This means that banks could suffer significant disadvantages due to exchange rate fluctuations if they lend to non-eurozone EU citizens. Assessing the scale of these risks is naturally difficult, especially as mortgage loans often have terms of more than ten years. The result is growing uncertainty among banks. Many are now refusing to approve loans to non-eurozone EU citizens, or are requiring far more equity capital than they used to.

A law full of contradictions

As a result, a Danish buyer has significantly poorer chances of securing a mortgage in  Germany than a French one, even though they are both EU citizens and enjoy the same basic freedoms. And there’s more: As the new Section 503 BGB only applies to EU citizens, Danish, British and Swedish buyers are actually in a worse position than buyers from outside the EU, such as those from the USA or China. However, there is still one way to get around this restriction: If a foreign buyer earns most of their income in Germany, they can agree in their mortgage contract that the loan currency should be denominated in euros. Typically, it is mainly high-net-worth individuals