Economy

Two developments point to rising building interest rates

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The German real estate market has long been characterized by high purchase prices and extremely low building interest rates. The corona pandemic did nothing to change that. As the “Handelsblatt” reports, however, there are two signs that the trend could turn around this year: The signs of inflation are increasing and the yields on government bonds are increasing.

According to the real estate expert at FMH Finanzberatung in Frankfurt, Max Herbst, the development of interest rates in mortgage lending is difficult to predict due to the pandemic and the development of inflation. If inflation rises, he believes it is possible to double interest rates to 1.25 percent at the beginning of the year – the highest level since February 2019. Construction interest rates are also linked to the development of government bonds with ten-year maturities, which have long been at record lows. At minus 0.26 percent, the yield on ten-year government bonds was recently the highest it has been since June.

Construction rates could rise

However, Herbst is not alone with his forecast; many other experts are also assuming that building interest rates will rise slightly. Even a small increase in interest rates is very noticeable when buying a property: for example, the annual interest rate with an interest rate of 0.8 percent for a loan of EUR 500,000 is EUR 4,000. At a rate of 1.3 percent, the debt already rises to 6,500, which results in a difference of 25,000 euros over ten years.

In the event that the negative economic effects of the pandemic continue, Herbst predicts only insignificant fluctuations of up to 0.25 percent upwards or downwards. In addition, this would also affect the market differently: In order to reduce risks, the banks could demand higher equity ratios and prefer secure jobs, such as civil servant positions.

Mirjam Mohr, Head of Interhyp’s private customer business, believes that, despite a slight rise in interest rates, interest rates will remain very low. The experts believe that an increase in loan interest rates to two percent is out of the question. So there is no need to rush to buy a property. Especially since the key interest rate of the European Central Bank is unlikely to rise due to the economically weak situation in Europe. Thus, major jumps are not to be expected for building interest either.

Forward loan as an interest guarantee

For all those who do not want to risk anything, there is the option of the so-called forward loan. This allows potential buyers to have the current interest rates guaranteed for follow-up financing. The forward premium is also currently at a record low. However, the longer the period between the fixing of the interest rate and the financing, the more expensive it becomes.

Whether with a forward loan or without – if you want to buy a property, you should pay attention to your personal limit. Herbst also advises always providing some financial leeway and contractually stipulating that the fixed interest rate also adapts to possibly changed living conditions. In addition, your negotiating position will be strengthened if you also obtain offers from the competition. So talk to the bank early on about the credit line and obtain a financing commitment – this will give you a head start on the housing market and over other interested parties.

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