New Regulation on the Determination of the Mortgage Lending Value: Limit for Small Loans Increases

27. Oct 2022

On 07.10.2022, Bafin published the amended Regulation on the Determination of the Mortgage Lending Value (BelWertV). Among other things, the limit for small loans increases to 600,000 EUR due to market developments. Previously, it had been 400,000 EUR.

Another significant adjustment relates to the use of computer-based valuation methods: For the first time, the amendment provides a regulatory basis for the use of statistical methods in determining the mortgage lending value. This relates to single-family and two-family houses as well as owner-occupied apartments. The Association of German Pfandbrief Banks (vdp) takes a positive view on this: “We very much welcome the fact that the use of statistical methods in property valuation is being manifested in the BelWertV. The procedures are now far more mature, reliably providing valid results,” says Tolckmitt. “Such procedures apply to multiple territories of owner-occupied residential property, which represents considerable progress for the banks,” explained vdp CEO Jens Tolckmitt.

Online viewings possible

After BaFin had temporarily allowed online viewings and video inspections at the beginning of the COVID 19 pandemic, they are now permanently permitted with the BelWertV amendment. Using this option, institutions must take in to account a discount of at least 5% when valuing the properties. Furthermore, the remaining useful life of the property must be at least 40 years.

Minimum capitalization rates to be linked to interest rate development

One of the major changes in the BelWertV is the adjustment of minimum capitalization interest rates. Instead of the previously applicable rigid interest rates of at least 5% for residential properties and 6% for commercial properties, a dynamic model will be used in the future: The minimum capitalization interest rates will now be based on the interest rate of the 30-year federal bond on a fixed date, to which a risk premium of 3% for residential properties and 4% for commercial properties will be added. Upper and lower limits are defined: The interest rates will always be between 3.5% and 5.5% for residential properties and between 4.5% and 6.5% for commercial properties, despite the surcharges for certain property types and the discounts for certain prime properties.

Undesirable fluctuations due to the cut-off date model

The vdp is critical of the cut-off date model used. Under this model, BaFin adjusts the minimum capitalization rates annually on January 1 on the basis of the daily reference interest rate on November 30 of the previous year, if this rate was at least 0.5 percentage points higher or lower at that time than at the time of the last adjustment calculation. The vdp had advocated a longer-term average in order to reduce the volatility of solely using the cut-off date approach, as well as to adjust to the different characteristics of capital and real estate markets.

The new BelWertV (full reference)