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Friday, May 09, 2025

Bafin Eases Risk Buffer for Property Loans Amid Stabilizing Market

Bafin Eases Risk Buffer for Property Loans Amid Stabilizing Market

New regulations allow banks to offer cheaper mortgages, raising questions about their sufficiency in addressing ongoing challenges in the real estate sector.
The Federal Financial Supervisory Authority (Bafin) has announced a reduction in the risk buffer required for mortgages in Germany, permitting banks to offer more favorable property loans.

This regulatory change comes as the German real estate market shows signs of stabilization after a period of decline in property prices.

The recent uptick in sales prices, alongside only minor reductions in interest rates, suggests that the risk of overvaluation in the market is diminishing.

In response, Bafin has lowered the capital buffer for lenders from two percent to one percent, marking the first easing of this risk premium in nearly three years.

This move by Bafin follows the introduction of the risk surcharge in 2022, implemented during a time when mortgage rates were particularly low, leading to significant indebtedness among borrowers.

The intent behind the high capital buffers was to ensure that banks maintained sufficient reserves to cover potential loan defaults in the event of rising interest rates or a downturn in the economy.

In its announcement, Bafin attributed the revision of the risk buffer to an observed stabilization in market conditions.

Real estate buyers, encompassing both individuals and larger businesses, are expected to benefit from this adjustment.

Jens Tolckmitt, a representative of the VDP (Association of German Pfandbrief Banks), noted that the removal of the sectoral risk buffer would positively impact all residential property loans, reducing a cost factor associated with equity reserves required for lending.

Moreover, this regulatory change is anticipated to enhance the flexibility of banks in granting loans, potentially increasing negotiation power for borrowers and stimulating activity within the faltering real estate market.

Despite these adjustments, there remain calls for more extensive reforms from real estate associations.

Major stakeholders have been advocating for the complete abolition of the risk buffer, although Bafin has ruled out a full retraction of these measures.

The authority cautioned that the current conditions still exhibit 'enhanced uncertainties' and indicated that the challenging economic situation might threaten the robustness of the job market, which in turn could heighten the default risk associated with real estate loans.

Additionally, the established 'countercyclical capital buffers' remain intact, requiring banks to reserve 0.75 percent of their total loan amount as a precautionary measure for future economic downturns.

This stipulation will likely continue to impose financial burdens on loan customers.

The pressure on Bafin persists, as the housing sector continues to demand more favorable financing conditions to revitalize construction efforts in Germany.

Current estimates indicate a shortfall of over 300,000 new homes annually.

In light of Bafin's decision regarding the risk buffer, the German Federation of Housing and Real Estate Companies (GdW) expressed strong discontent, stating that affordable financing is essential for achieving affordable housing solutions.
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