Assumption of debt

Assumption of Debt - The assumption of debt is a legal transaction in which a third party (typically the real estate buyer) steps into an existing loan agreement in place of the previous debtor (the seller). It is governed by Sections 414 through 418 of the German Civil Code (BGB) and requires the mandatory approval of the creditor, i.e., the financing bank.

Legal Basis and Procedure

In the case of an assumption of debt in the context of a real estate purchase, the buyer assumes the seller’s existing loan along with all rights and obligations. The previous debtor is completely released from the debt relationship. The assumption of debt can take place in two ways: through a contract between the buyer and the creditor (Section 414 of the German Civil Code (BGB), known as “expromission”) or through a contract between the seller and the buyer, which only becomes effective upon the bank’s approval (Section 415 of the German Civil Code (BGB), known as “delegation”).

In practice, the second option is the norm. The seller and buyer agree to the assumption of debt in the notarized purchase agreement, and the notary then obtains the bank’s approval. The bank is not obligated to approve the assumption. It assesses the buyer’s creditworthiness using the same criteria as for a new loan. If the bank denies approval, the seller remains the debtor of the loan, and the purchase price must be raised by other means.

A key advantage of debt assumption is the opportunity to secure favorable historical terms. If the loan was taken out during a period of low interest rates, the buyer can benefit from an interest rate that is significantly below the current market level. Additionally, the prepayment penalty that the seller would have to pay in the event of early termination of the loan is waived.

Distinction from Joint Liability and Assignment of a Land Charge

Debt assumption must be distinguished from joint liability (cumulative debt assumption). In the case of joint liability, the buyer joins the seller in the debt relationship, so that both are jointly and severally liable. The previous debtor is therefore not released from liability. This arrangement is rare in real estate transactions but can play a role in certain situations involving family members or changes in shareholders.

Mortgage assignment often occurs in connection with debt assumption. Instead of canceling the existing mortgage and registering a new one in favor of the buyer’s financing bank, the mortgage can be assigned to the new bank. This saves land registry costs and notary fees, as only a declaration of assignment is required instead of a cancellation and new registration. If the loan is continued with the same bank as part of a debt assumption, the land charge remains unchanged anyway.

Economic Significance in a High-Interest-Rate Environment

In periods of rising interest rates-such as since 2022-debt assumption becomes significantly more important. An existing loan from 2015-2021 with an interest rate of 1.0-1.5% p.a. is extremely attractive compared to current new loan terms of 3.5-4.5% p.a. For a loan of €300,000 with a remaining term of 8 years, assuming the existing loan results in interest savings of up to €60,000-70,000 compared to new financing.

However, these savings must be weighed against the disadvantages: The repayment schedule is fixed, rights to make extra payments are limited, and the remaining term of the fixed-rate period may be shorter than desired. In addition, the buyer often pays a higher purchase price for the interest savings-sellers add the interest savings to the purchase price in their calculations. Whether the debt assumption pays off in the end should therefore be carefully calculated.

Tax Treatment of Debt Assumption

For investors, the tax implications of debt assumption are relevant: The assumed interest expenses are deductible as income-related expenses against rental and leasing income-just as with a newly taken-out loan. Principal payments, however, are not deductible. Since the principal portion of older loans with low interest rates has increased over time, the tax-effective interest portion for assumed older loans is typically lower than for a new loan with the same remaining debt. This should be taken into account in the profitability calculation.

Practical Tip for Nuremberg and the Metropolitan Region

Given current interest rates, assuming a loan in the Nuremberg metropolitan area can be particularly advantageous if the seller is servicing a loan with an interest rate from the years 2015 to 2022. We recommend that buyers have a professional assess whether assuming the existing loan is financially beneficial before making a purchase decision. In doing so, not only the interest rate but also the remaining term, the repayment structure, and any special repayment rights must be taken into account. Sellers, for their part, benefit from not having to pay an early repayment penalty, which effectively increases the sales proceeds.

We assist buyers and sellers in the region with reviewing debt assumption scenarios and coordinate communication with the banks involved. Please contact us early on-ideally as soon as the property is viewed-so that the loan details can be obtained from the seller.

Frequently Asked Questions About Debt Assumption

Does the bank have to approve a debt assumption?

Yes, the bank’s approval is mandatory. Without the creditor’s consent, the debt assumption is invalid. The bank assesses the buyer’s creditworthiness and may deny approval without providing a reason. In practice, banks agree to a debt assumption if the buyer’s credit rating is at least equal to that of the previous debtor.

What are the advantages of a debt assumption over new financing?

The biggest advantage lies in the potential interest savings if the existing loan has more favorable terms than those currently available on the market. Additionally, the seller avoids prepayment penalties, and the buyer may avoid some of the costs associated with establishing a new mortgage. The total savings can amount to several thousand euros for larger loans.

What are the risks involved in a debt assumption?

The buyer assumes the loan with all existing terms, including any restrictions on special prepayments or changes to the repayment schedule. Additionally, the remaining term of the fixed-rate period may be shorter than with a new loan, meaning a refinancing risk arises sooner. We recommend carefully reviewing the loan terms in advance and comparing them with current offers before making a decision.

What happens if the bank refuses the debt assumption?

In this case, the seller remains the borrower. The buyer must arrange their own financing. The seller’s existing loan is then paid off from the proceeds upon payment of the purchase price-possibly with the payment of an early repayment penalty. For properties with existing loans, these costs should be calculated before the contract is signed. An experienced mortgage broker can request the redemption amount from the bank in advance to determine the actual costs.

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