Currency clause

Currency Clause - A currency clause is a contractual provision that ties the purchase price, rent, or other payment obligation to a specific foreign currency or exchange rate. In the real estate sector, currency clauses are found in cross-border transactions, foreign currency loans, and international investment agreements. In Germany, the use of currency clauses was subject to the Price Clause Act until the introduction of the euro-today they are largely irrelevant in the eurozone, but still play a role in foreign real estate transactions.

Foreign Currency Loans

A foreign currency loan is a real estate loan taken out in a currency other than the euro (e.g., Swiss francs, Japanese yen). The loan installments are calculated in the foreign currency and converted into euros at the current exchange rate when due. Advantage: In currencies with low interest rates (CHF, JPY), interest rates were at times significantly lower than in the eurozone. Risk: Exchange rate fluctuations can significantly increase the burden-a rise in the foreign currency’s value makes the installment more expensive. The Swiss franc shock of 2015 (a 20% appreciation in a single day) put numerous CHF borrowers in a difficult position.

Foreign-currency loans were marketed primarily in Austria and Switzerland in the 2000s and 2010s, but also sporadically in Germany. The basic principle was tempting: In Japan, for example, interest rates were below 1%, while German banks charged 4-5% for euro loans. However, exchange rate risks are virtually impossible to calculate in the long term-and if the foreign currency appreciates, not only does the monthly payment increase, but so does the total remaining debt expressed in euros. Many borrowers found that their remaining debt in euros had risen despite years of repayment.

Currency Clauses for Overseas Real Estate

When purchasing real estate abroad (e.g., Spain, Greece, Turkey), the purchase price is often agreed upon in the local currency. A currency clause can link the purchase price to the exchange rate at the time of payment or establish a fixed exchange rate. Without exchange rate hedging, the buyer bears the full currency risk: if the euro depreciates against the local currency, the purchase becomes more expensive for the euro payer.

For real estate in countries with volatile currencies-e.g., Turkey (Turkish lira) or Eastern European countries outside the eurozone-the currency risk is particularly high. A clause that fixes the purchase price in euros protects the European buyer but can be disadvantageous for the local seller. Alternatives for hedging include forward exchange contracts with the buyer’s bank, in which the exchange rate is fixed for a specific date, or currency options, which limit the risk of loss but incur premiums.

Legal Framework in Germany

In Germany, the Price Clause Act (PrKG) has been in effect since 1998, regulating value protection clauses-and thus also currency clauses-in lease and purchase agreements. Clauses that automatically link the purchase price or rent to an exchange rate require approval from the Deutsche Bundesbank-or they must meet one of the statutory exceptions. In practice, this is irrelevant for domestic euro transactions, as all payments are made in euros and no clauses are required.

Practical Tip for Property Owners in Nuremberg

We recommend that property owners and investors in the Nuremberg metropolitan region refrain from taking out foreign currency loans for domestic real estate-in most cases, the risks outweigh the interest rate advantages. Anyone purchasing a property abroad should actively hedge the currency risk: through a fixed exchange rate in the purchase agreement, through a forward exchange contract with the bank, or through financing in the local currency (provided this is possible locally and makes economic sense). Consulting a financing advisor specializing in international transactions is essential here.

Investors in Nuremberg interested in foreign real estate should also bear in mind that currency risks affect not only the financing of the purchase price but also ongoing rental income: Anyone who rents out a vacation home in Turkey or an apartment in Poland and receives the income in foreign currency bears the ongoing exchange rate risk. Professional currency advice-e.g., from foreign exchange specialists at your primary bank or specialized currency brokers-helps make the risk calculable.

Frequently Asked Questions

Are foreign currency loans still common in Germany?

No, following the negative experiences with CHF loans in the 2000s, foreign currency loans have largely disappeared in Germany. The Mortgage Credit Directive (2016) requires banks to inform consumers about exchange rate risks and to offer debt restructuring in euros once certain thresholds are reached. For new real estate financing in Germany, we recommend euro loans with a fixed interest rate without exception.

What risks are associated with a foreign currency loan?

The main risk is exchange rate risk: If the value of the foreign currency rises against the euro, both the monthly payments and the remaining debt (converted to euros) increase. During the Swiss franc shock of 2015, the euro-denominated burden on many CHF borrowers rose by 20% overnight-as did the remaining debt. In the worst-case scenario, the remaining euro debt exceeds the property value (negative equity). Additionally, exchange rate fees are incurred with every installment payment.

Can I refinance a foreign currency loan into euros?

Yes, refinancing into euros is generally possible. Under the Residential Mortgage Credit Directive, the bank must offer a refinancing if the remaining debt or the installment has increased by more than 20% due to exchange rate fluctuations. The refinancing is carried out at the current exchange rate - if the euro has lost value, a loss is realized. Nevertheless, refinancing often makes sense to limit further losses.

What is a gold clause, and why is it prohibited?

A gold clause links the payment obligation to the price of gold-it is generally prohibited in Germany under the Price Clause Act, as payment obligations must be fulfilled in euros. Historically, gold clauses were used during periods of inflation to preserve the purchasing power of claims. Today, they are not permitted in Germany and would be rejected by notaries in real estate contracts. However, legally defined value protection clauses-such as those linked to the consumer price index-are permitted.

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