The European Commission will make mortgage loans more comparable. In the future, banks will have to advertise with more realistic interest rates and, in addition, have to examine whether borrowers can sustain the debt service on their own.
It is still unclear whether, from the point of view of consumers, there is relief in the case of indemnity payments customary in Germany.
Real estate loans
Although bank customers are not as fully informed about a product as they are about real estate loans, many contracts do not suit the customer. This had recently been the subject of another study by the Verberg. The verdict of consumer advocates: In more than 70 percent of the cases examined, the loan did not fit the demand. Disadvantages were the duration of the fixed interest, the loan amount and the current installments.
The draft law of the EU Commission stipulates that all costs must be taken into account in the effective interest rate. That applies at least to bank loans already. The problem, however, is that many institutions are offering interest rates that only a fraction of borrowers can actually receive. They quote in their offers interest rates, which apply to a lending expiry of 60 percent and thus require a comfortable equity.
A large part of the financing on the German market is implemented with much less own funds at correspondingly worse conditions. In terms of loan repayments and maturities customary for home equity financing, an interest rate differential of one percent has a dramatic impact on the overall burden.
In the future, banks should also check whether their customers are (permanently) able to service the loan. This advance is related to the financial crisis, which was partly caused by blistering of various real estate markets and the resulting over-indebtedness of many households.
Borrower’s interest rate
The present draft does not contain any clear statements about possible changes in the case of indemnity payments. The Commission does not spell out that the compensation must not burden consumers “too much”. What exactly is meant by this, but leaves it open. It also provides for the possibility of national regulations.
In Germany, indemnity payments are important because the lion’s share of financing is tied up in interest rates. Unlike consumer loans, it is not easy to cancel mortgage-backed loans with fixed interest rates. In particular, banks can demand a high compensation. Depending on the reason for the termination, the compensation may even be determined at its reasonable discretion. The law provides for the possibility of a free cancellation only after the expiration of ten years.
Banks are already warning against a ban on indemnity payments. The Association of German Pluse Banks points out that loans with fixed interest rates would then be more expensive. With 200,000 euros loan amount would be paid around 50 euros more a month. In the opinion of the association, this could lead to more borrowers opting for a variable interest rate and thereby accepting greater risk.
Consumer advocates call for the abolition of compensation for borrowers who need to sell their property for professional reasons or an emergency. They also want binding rules for the compensation when switching to another provider.