What is changing due to the residential property loan directive?
On March 21, 2016, the EU directive on residential property loans was introduced. The purpose of the residential property loan directive is to protect house builders and property buyers against financial overload and to prevent foreclosures.
Borrowers should be able to service their loan installments in the long term in accordance with the contract and should be better protected against over-indebtedness.
If the bank does not meet its obligation to thoroughly check the applicant’s creditworthiness, the borrower can even terminate the loan agreement without notice. In this case, the bank may not demand a prepayment penalty.
In fact, the new law is already having an impact. The number of real estate loans granted to private customers at the savings banks fell by almost 9% in the first half of 2016. The consequences of the residential property credit directive are also noticeable at the cooperative banks.
What has changed as a result of the residential property loan directive and which requirements must borrowers now meet?
The residential property loan directive relates to construction loans, real estate loans, follow-up financing as well as loans for renovation and modernization measures. It stipulates that banks need to better educate their customers about exactly what services, obligations, and risks are associated with mortgage lending or real estate loans and what costs the borrower has to bear.
All these points are recorded in the so-called “GFI leaflet” (Good Finance). After signing the contract, borrowers will be given the GFI leaflet. This is to avoid that customers are burdened with a five- or six-figure financing sum without having received extensive advice.
In addition, the residential property credit directive requires borrowers to be more thoroughly screened for creditworthiness. No exact procedure is prescribed by law as to how the creditworthiness should be determined exactly. According to §505a BGB, however, it must be ensured that the borrower is likely to meet his payment obligations.
A lender may only conclude the consumer loan contract if it is evident from the creditworthiness check
Among other things, it says: “The lender may only conclude the consumer loan contract if it is evident from the creditworthiness check that (…) it is probable with a real estate consumer loan contract that the borrower will meet his obligations (…) in accordance with the contract.” Plain text: If according to the creditworthiness check, a borrower is unable to pay his credit installments with a certain probability, the bank may not grant a loan.
As part of the credit check, the bank has to use various factors to forecast how the applicant’s income situation is likely to develop and whether he will still be able to pay his installments regularly in a few years. Banks have become much more careful when granting real estate loans. This is also plausible because the financing bank is liable in the event of incorrect or insufficient advice.
How much the financed property is worth and the likelihood that the property can be quickly sold in the event of a default does not play as much of a role in deciding whether or not an applicant will get a loan as before the directive.
Instead, the bank has to examine closely what it is about solvency and how high the risk is that the current income-expenditure structure may deteriorate in the future. If, for example, it is foreseeable on the basis of a temporary employment contract that the income structure will not remain at the same level within the next 5 to 10 years, this risk must be included in the credit decision.
While credit institutions made the loan decision and the amount of the loan before the introduction of the residential property loan directive primarily dependent on the value of the property and income was a secondary factor, income or credit quality has now become at least as relevant.
People who earn very little therefore have significantly worse chances of getting a real estate loan than before the residential real estate loan directive came into force. Young families in which only one parent works and earns poorly or on average well, as well as older people with a low pension, are clearly disadvantaged.
In fact, there is still a need for optimization in several places in the residential property loan directive. Negative forecasts regarding creditworthiness have a major impact on the credit decision, while positive forecasts are often neglected. The residential property directive makes it particularly difficult for banks to take into account the individual circumstances of their clients, such as an expected legacy.
According to many banks, hypothetical salary increases that would significantly improve the borrower’s income situation during the loan term can no longer be taken into account. For older people, the bank advisor must ensure that the loan is repaid by the average expected age of the borrower.
Scenarios in which heirs pay the remaining debt, for example, are not taken into account when making a loan decision. With the introduction of the residential property directive, self-employed people find it even harder to get a real estate loan due to their often fluctuating income.
Deal with follow-up financing
Homeowners who took out their real estate loan before the introduction of the residential property loan directive and now have to deal with follow-up financing when the fixed-interest period expires can no longer switch banks so easily to get better terms, or in the worst case may even be rejected by their own bank, even though they have always serviced their current loan on schedule.
The following example illustrates the problem quite well: A young couple with good income (together USD 3,750 net per month) wanted to buy a property. The family planned to take out a real estate loan of USD 350,000 and bring USD 20,000 inequity and a home loan contract into the financing.
The woman was on parental leave. However, the bank rejected the application for the real estate loan. The family could not understand the bank’s decision. After all, the man had a permanent job with an above-average salary. However, the bank argued with the very low forecast of the young couple’s pension and the risk that the woman would no longer be able to start working after parental leave.
This overly cautious behavior of the banks is no exception. Because banks face severe penalties if you do not check the creditworthiness of your clients closely enough and thus violate §505a BGB. There are fears that the directive will prevent entire sections of the population from buying home.
Therefore, several federal states are already requesting a corresponding correction of the directive. The federal government, consumer protection, and the banking industry want to make proposals to define the content of the directive more clearly and to better align it with customer benefits.
Financing experts at credits are aware
The financing experts at credits are aware of the problems that have arisen with the introduction of the new residential property loan directive. Thanks to our many years of expertise and our cooperation with all relevant banking partners, we have been able to keep the financing ratio among our clients at a consistently high level.
Are you currently planning to finance a new property? Please do not hesitate to contact us – we take the time to carry out a comprehensive analysis of your financial situation and show you various financing alternatives.