As of: 06/29/2021 12:57 p.m.
A trend reversal is emerging in real estate loans. The recently very low building interest rates are rising again noticeably. However, borrowers can often cushion the consequences.
From Andreas Braun,
tagesschau.de
The era of “cheap money” is drawing to a close for mortgage lenders as well. Anyone who has received construction money from the banks for almost free when buying their own home in recent years now has to accept higher mortgage rates again.
The curve for building interest will rise again clearly upwards in mid-2021. For ten-year mortgage loans, the Interhyp financing portal has shown an average interest rate of 1.0 percent for the first time since 2019. FMH Finanzberatung, also specializing in current interest rate comparisons, had determined an annual interest rate of just under 0.9 percent for a comparable loan at the end of May. FMH founder Max Herbst expects a further increase in the course of the year, between 1.2 and 1.5 percent the interest for a real estate loan with a ten-year term.
Doubling by the end of the year?
Compared to the record lows, which were reached at the beginning of 2021 with 0.6 to 0.7 percent, this would be a straight doubling. The interest burden, which had fallen to ever new low levels for property buyers in recent years, is once again an important cost factor for home builders.
A calculation example makes it clear what this means for new financing or for contracts with fixed interest rates: With a loan amount of 300,000 euros and an annual repayment rate of three percent, a mortgage rate of 0.7 percent means a monthly loan installment of 925 euros. If the interest now rises to 1.4 percent, the monthly charge climbs to 1,100 euros. This corresponds to an increase of almost 20 percent. Every year, 2100 euros more have to be spent on paying off the building loan.
Inflation also drives building interest rates
The reason for the rise in building interest lies in the end of the long period of low interest rates on the international capital markets. The rise in prices in the USA, but also in Europe, is causing interest rates to rise gradually. The first interest rate hikes by the central bank in the USA are already in prospect, and the ECB will probably have to raise interest rates in the longer term in order to contain inflation risks in the euro zone.
The interest rates on government bonds such as federal bonds, but also on Pfandbriefe, are already rising. Mortgage bonds are used to refinance real estate loans through the banks. But if the borrowing costs for the banks rise, these will be passed on to the consumers in the form of higher interest rates, including the borrowers of mortgage lending.
Home ownership is becoming more and more expensive
This means that property buyers are burdened more heavily on two sides. In addition to the higher borrowing costs, rising prices for condominiums and houses are also making real estate ownership increasingly unaffordable. The house price index published by the Federal Statistical Office shows an increase of almost ten percent for residential property in Germany in the first quarter of 2021 alone compared to the same period of the previous year. In metropolitan areas, the inflation rates are even higher.
So if you want to buy your own home in the coming months or years and need a building loan for it or use a mortgage loan with an expiring fixed interest rate, you will have to be prepared for higher burdens if the interest rate trend continues. Those who assume this development can secure the interest rates that are still very favorable at the moment with a so-called “forward” loan, whereby the current interest rate is secured for a certain period of time, usually up to four years, for a small surcharge . However, the longer this period, the higher the interest premium.
Optimize or avoid interest costs
A longer fixed interest period also secures the current level of interest rates for loan customers. However, if you choose a fixed interest rate of 15 or 20 years, you have to accept a slightly higher interest rate for this period than debtors who only finance for five or ten years.
Last but not least, it can be worthwhile to pay off a mortgage loan with a low interest rate faster. Then, following a fixed interest rate, less remaining credit has to be refinanced at a poorer interest rate. Most banks allow the repayment installment to be increased during the term of the contract, for example from two percent per year to up to five percent of the original financing amount. The loan can also be paid off more quickly through special repayments, i.e. annual one-off payments, in order to reduce higher interest charges in the future.