One of the most frequent questions investors have as they research the market is what finance is available to international clients and how is it arranged. This short brief will give an overview to new investors to the market on the finance possibilities and general points.

General Situation

It has been surprising how, right the way through the credit crisis, German banks have remained confident in their lending to the residential sector of the German market. Whilst finance possibilities, particularly for foreign nationals, have dried up in many established markets or punative rates are applied, the German banks have been consistent in their lending. One impact of the bank’s reduced liquidity has been that the loan-to-value [LTV] which is offered has come off a little, but that is really it.

Who Finances in Germany for Foreign Clients?

Each state of Germany will have different practices in place and different  approaches to foreign investors. In Berlin for example, the lending to  international clients is well-established and most financial institutions will lend to clients from all over the world. In the state of Saxony, home to the investment areas of Leipzig, Dresden and Chemnitz, a more limitied number of banks are accustomed to the lending to international clients. These tend to be the larger banks, with international exposure such as Deutsche bank and Commerzbank. It is usual for investors to employ the uses of an independent consultant to source their finance requirements. Whilst this service cost the same as making a direct approach to a bank, the consultant will have “range of market” access to funds and will often make the process to getting an agreement in principle that much easier.

What Level of Lending is Usual?

Up until 2010, bank lending for non-residents of Germany was up to a limit of 80%. Since bank liquidity continues to be tight, this level has fallen to 60% LTV [sometimes a little higher]. The level the bank will lend to is based principally on the type of property being financed. Well-located properties will always
finance well, as will properties with a stable and full [or near full] tenancy list. The banks usually seek 125-130% net rent to finance payment coverage, around 6% net yield. Once this is achieved it is the quality of the property that dictated the level of finance agreed.

What are the bank criteria?

The banks will consider finance in each case properties which meet the following criteria:

· Above 50.000 Eur in value
· Above 80% tenanted state on purchase
· Property that has less than 30% of the rental income from commercial sources

Properties that do not meet this criteria are dealt with on a case-by-case basis. Investors themselves have only to complete a 2 page application form [in English] which outlines their income and equity positions. The banks usually seek an income from investors from their employment, business or  investments of 40.000 Euro per annum.

Application Process

After the completion of a 2-page “self declaration” form, the investors  paperwork is collected and put together with the property object to be  financed. The property will then have a valuation report made by one of the  banks chosen panel of surveyors. The gathering of all these documents  typically takes 2 weeks. The case is then presented to the Credit Department who will make a decision usually with 7- 14 days. The agreed finance terms are then valid for a set period, to allow completion to occur.

Finance Terms

It is typical for investors to take either a 5 or 10 year fix rate product, although other lengths are possible. The mortgage terms are usually on a repayment basis, typically over a 20-year period, depending on the age of the investor. An arrangement of 1% of the loan amount is very typical for all lending  institutions in Germany.

In terms of interest rates, a loading over the bank inter-lending rate or the so-called “swap rate” is made. This loading is typically around 1,3%. So it is important to note that interest rates vary each day, until a finance case is agreed. The swap rate for the day can be found at:

Swap Rates

Interest rates during 2010 have been around 3.5% for a 5 year fix and 4.2% for a 10 year product. As a guide to investment, 100.000 Eur borrowed, on a repayment basis, will cost per month:

At 3.5% interest rate – 579 Euro
At 4% interest rate – 606 Euro
At 4.5% interest rate – 632 Euro

Please do contact the ProVenture team for more advice on finance or helping in making cash flow projections.