How a German home loan works: contract, credit check, lien

What the law calls your loan

Section 491(3) of the Civil Code (BGB) defines the category. A loan falls into it when it is secured by a land charge or a Reallast (annuity charge), or when it is meant for acquiring or keeping ownership of land or buildings, including buildings still to be built. The lender must be a business and the borrower a consumer. Where a loan fits this definition, the consumer-credit chapter of the BGB applies in full, whatever the borrower’s nationality or tax residence.

The basic duties come from section 488 BGB. The lender makes the agreed sum available. The borrower pays the interest owed and repays the loan when it falls due.

Before you sign

The lender has to inform you before the contract is concluded, in the form laid down by Article 247 of the introductory act to the BGB (section 491a(1) BGB). You may ask for a draft of the contract. Where a lender makes a binding offer on specific terms for a real-estate loan, it must at least offer to hand over a draft. If there is no withdrawal right, the draft must be handed over. The lender must also give “adequate explanations” so that you can judge whether the product suits your purpose and your finances (section 491a(3)).

The contract itself must be in writing and must contain the mandatory particulars of Article 247 (section 492 BGB). After signing you receive a copy, and while a repayment date is set you may demand a repayment schedule at any time (section 492(3)). A variable rate tied to an index is valid only if the index is objectively defined and verifiable by both sides (section 492(7)).

Withdrawal or cooling-off

A consumer loan carries a statutory right of withdrawal under section 355 BGB, with a period of 14 days. The period does not begin until the lender has given you the contract document or a copy of your application (section 356b(1)). If the mandatory particulars on the withdrawal right are missing, the period is one month and starts only when they are supplied. For a real-estate loan the right expires at the latest twelve months and 14 days after conclusion.

One exception matters in practice. No withdrawal right exists for a contract that must be notarised, if the notary confirms that your rights under sections 491a and 492 have been respected (section 495(2) no. 2). In that case the lender has to give you a reflection period of at least seven days before the contract is concluded, and the lender stays bound to its offer during that time (section 495(3)).

The credit check

Before concluding the contract the lender must assess your creditworthiness (section 505a(1) BGB; the same duty appears for credit institutions in section 18a of the banking act, KWG). For a real-estate loan the lender may conclude the contract only if the check shows it to be likely that you will meet your obligations. A material increase in the net loan amount after signing requires a fresh check (section 505a(2)). The statute does not list the documents the lender will ask for. Which documents it asks for is a matter of the lender’s own procedures; for borrowers living abroad see the guide on mortgages for non-residents.

Security: the land charge

The usual security is a Grundschuld on the property. The loan agreement and the land charge are separate things, tied together by the security agreement. The mechanics, the notary and registry fees and the deletion are in the guide on the land charge. As a worked calculation under the GNotKG, a €300,000 land charge costs 1.0 of the Tabelle B fee at the notary and 1.0 at the land registry; with Tabelle B at €635 for that value, that is €635 at the notary plus 19% VAT and €635 at the registry.

Interest and how long it is fixed

The law distinguishes a fixed rate (gebundener Sollzinssatz), set as a fixed percentage for a period, from a variable rate. The borrower’s termination rights depend on which you have (section 489 BGB). They are explained in the guide on fixed-rate periods and, for early exits, in the guide on the early-repayment penalty. The current market level is covered in the guide on Bundesbank mortgage rates.

If you fall behind, section 497(4) BGB sets the default interest on a real-estate loan at 2.5 percentage points above the base rate (Basiszinssatz) per year.

A loan in another currency

If your loan is not in the currency of the EU state where you live, section 503 BGB gives you the right to convert it into that currency once the outstanding balance or instalments, measured in your home currency, exceed what the original exchange rate would have given by more than 20%. The contract may define your home currency differently, for example as the currency in which you mainly earn. Check that clause if you earn abroad.

Which professional to consult

A mortgage broker who mediates or advises on real-estate loans needs a permit under section 34i of the trade regulation code (GewO) and must be entered in the Vermittlerregister, which you can search yourself (see the mortgage-broker page). The notary certifies the land charge and checks the loan documents when notarisation is required (see the notary page). To size a loan, try the mortgage calculator.