This month we are delighted to present our interview with Martin Bonnet, a mortgage broker that we work with in Germany:

Hi
Martin, many thanks for agreeing to do this interview. To start us
off, can you please give us a quick introduction to yourself and your
history.

Hi James, it is a pleasure for me, I am almost 47 years old, two
children, I live in Berlin-Köpenick where I can directly feel the
pulse of Germany’s fascinating capital but at the same time enjoy its
large forests and waters. From 1988 until 1992 I studied business
administration at Mannheim University, and finished with a diploma.
Thereafter I worked for the financial department of a big company
before I became a financial advisor in 1999. Since then I have been
working as an investment consultant and mortgage broker. In 2005 I
started to focus on arranging for mortgages for foreign investors.

Since ProVenture Property have operating in Germany, we have noticed willingness to lend has
decreased. Can you please provide a bit of background on how you have
seen banks’ willingness to lend change in the last few years.

The boom of lending money to foreign investors was steadily increasing
when I started my activities. The peak was in 2007. After the default
of Lehmann Bros. in 2008 the willingness of banks to provide
reasonable mortgage dropped immediately and sharply. It then
recovered slowly to kind of a pre-Lehmann level. As property prices,
however, have developed much faster than rents, the LTVs banks offer
have slightly declined in areas where yields have dropped
significantly.

How does the financing process in Germany function in general for foreign investors?

The process itself mainly depends on the kind of the property and the
strategy of the investor. Normally the investor has to firstly decide
whether he prefers to finance as an individual or as a company. Once
he has selected the possible investments the next step is to provide
his finance broker with the property details, which the bank requires
for assessment, as well as personal details. The broker edits the
data and forwards them to suitable banks. The banks then indicate how
much they will loan and on what terms they might provide for the
investment. The resulting offer needs to be confirmed by closer
examination, often in connection with a survey. Normally the investor
has to pay for such a survey in advance. Thus after the indication an
investor’s first essential decision is whether to continue the
finance process by paying for the survey, or to stop it, in the event
that the best finance amount indicated by the bank does not match his
expectations. Once the result of the survey has been provided by the
evaluator, and once the loan has finally been approved by the credit
department, the loan contracts will generally be ready for signing
within few days. Apart from this, additional details and documents
might be requested by banks for their final decision at some time
during the process.

How many and what banks are involved in an enquiry?

All banks operating in Germany are in the pool. It has turned out that
most finances are arranged with an ever-changing hard core of seven
banks, which include mortgage or retail banks.

Some of our clients are unsure whether to purchase a property under a
company vehicle or as a private individual. Can you please give a
short outline to the pros and cons of buying through each.

Primarily this is a matter of an investor’s preferences and strategy. Setting
up and running a company will cause extra expenses, but might provide
tax advantages. Some banks even accept non-recourse terms for
companies, some insist on personal liabilities of the partners. Some
banks only provide mortgages to individuals, some only to companies.
A rule of thumb is that the higher the mortgage the more likely it is
that a company is the better choice. If an investor feels unsafe
about this decision he/she should consult a German tax advisor and
mortgage broker in time to discuss pros and cons.

What is the minimum loan possible?

Euro 25,000 – this means that a property should at least have a purchase
price of Euro 50,000 because for small flats banks rarely give more
that 50-60% of the purchase price.

What properties can be financed?

What are the current fixed rates for 5 and 10 years?

5y some 2% p.a.; 10y some 3% p.a.

The big question we get asked by most of our clients is, what LTVs are
currently available?

The range goes from 40% to 80% of the purchase price. Where one will
finally land mainly depends on the sustainable yields a property will
earn for the investor, the quality of the property and its location.
Most mortgages will be somewhere between 55% (flats) and 75%
(high-yield, but good quality multi-storey buildings in acceptable
areas)

What criteria do banks look for, both for the property and also the
individual, to get the highest LTV possible?

The investor’s background is – if at all – less relevant. Some banks want
to see stable economical figures as well as a reasonable track record
in your home country. The latter rather applies to bigger investments
starting from € 2-23 millions. As mentioned above, concerning the
property the main criteria are the sustainable yield as well as the
substantial quality and the location.

Are there any cities in which the banks prefer to lend?

Definitely, but a more precise definition would be that all areas where there is
population growth are preferred – for obvious reasons! ProVenture Property in the past
has done some very valuable research on this criterion for its
clients.

Redemption (early repayment) fees can be very high for clients looking to sell
at the moment since interest rates have dropped since they purchased.
what would the early repayment fees are charged by banks if interest
rates increase between purchases now and the point of sale?

In Germany such penalties by law must be not more than a compensation
for a bank’s damages. If an investor repays earlier and the bank can
reinvest the previously repaid amounts at same or higher rates at the
capital markets, then there must not be a penalty (apart from a
negligible service fee). If the capital market rates are lower then
the bank can charge the difference (for experts: The discounted
differences as we talk about future payments when looking at the remaining period
of the mortgage which have to be turned to present compensations).
Increasing rates therefore might lead to no penalty at all.

Finally, if someone wants to speed up the finance application process, what
documentation/evidence can they collect together before submitting an
offer on a property?

There are some standard documents like a recent copy of the property’s land
register, floor plans etc. – which all are to be provided by the
seller or the agent, respectively. The rest is bank-specific, but it
is definitely no mistake to have one’s proofs of income (most recent
tax assessment notices, payslips etc.) at hand when going for a mortgage.

Anything else our investors should know?

As you are buying in a foreign country it is essential to be able to
rely on good advise. Like a reasonable tax advisor or a good real
estate agent an experienced mortgage broker might add considerable
value to your investment. Not only will he find/negotiate good terms
for you, but also will he accompany you actively through the process
and moreover provide “after-sale” service to you.

Thank you Martin, that was very insightful.