Real estate loans: what is the benefit of the new EU directive?

The European Parliament has adopted new rules on real estate loans on Tuesday of last week. Presumably, from April 2015, consumers will have more extensive information rights. It is still unclear whether the new regulations on special repayments on the German market actually lead to sinking indemnity payments. for further explanation

The Directive requires banks to inform consumers about potential risks to interest and principal payments before entering into a credit agreement. For this purpose, a uniform European Information Sheet is to be identified, in particular on risks in connection with interest rate changes in variable and fixed-rate loans (this concerns higher interest rates for follow-up financing).

Early repayment will be easier, but not necessarily cheaper

Early repayment will be easier, but not necessarily cheaper

Borrowers should also be able to repay their loan in the future ahead of schedule. So far, it is unclear how this requirement will affect German legislation with regard to indemnity payments. To date, banks only have to agree to a loan cancellation by the borrower if there is a legitimate interest.

For these cases, where the financed property is usually sold or an application to increase the bank’s credit is not granted, the German jurisdiction prescribes stricter rules for the determination of the compensation. If a loan is terminated without a legitimate interest, the Bank may determine the compensation at its own discretion.

The German MEP Andreas Schwab (CDU) wants to stick to the core of the previous regulation. In his view, this ensures “the interest rates of German banks for real estate loans very favorable in European comparison”. A specific ceiling for compensation is out of the question.

Until further notice, no effects

Until further notice, no effects

The rules will only apply to new contracts and should not entail any fundamental improvements for borrowers. The EU associates the Directive with the mortgage bubble in Spain, for example, and claims to prevent its advisors from advising clients on excessive credit. In this way, “responsible lending” (Michel Barnier) should be promoted.

The presentation supports the presumption that the Directive is a pipe-nut without substantial improvements for borrowers or the functioning of the credit market itself. Mortgage bubbles are not created by overly expensive but rather cheap loans, and at least the German market for real estate loans has become very transparent and efficient (in the sense of a small margin for banks) through intermediaries in recent years.

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