Mortgage rates on 10-year fixed-rate loans are now above four percent in Germany. What does this mean for homeowners and buyers?
Many people in Germany dream of owning their own home, whether it’s an apartment in the city or a cottage in the suburbs.
But there is not so great news: purchasing property is becoming more expensive.
According to the financial services provider Interhyp, mortgage interest rates for 10-year fixed-rate loans currently stand at just under 4.2 percent.
Another German mortgage provider, Dr Klein, estimates average annual interest rates at 4.1 percent. By way of comparison: a year ago, the corresponding rate at Dr Klein stood at 3.4 percent. That means within 12 months, mortgage rates have risen by around 0.7 percentage points.
What higher mortgage rates mean for buyers
Anyone thinking of buying a home has to factor in the latest numbers into their calculations.
“People are doing their sums very carefully,” Thomas Kreil of Interhyp told German broadcaster ARD.
“Prospective buyers are scrutinising things more closely: Which property should they go for? What monthly repayment makes financial sense in the long term?”
The financial advice service Finanztip illustrates just how significant the recent rise in interest rates is. Property expert Dirk Eilinghoff said that for a loan of €300,000, the new rates could see customers paying an extra €250 a month.
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Why mortgage rates are rising now
The long-term interest rate level on the capital market is the key factor determining mortgage rates.
Yields there have recently risen sharply. In mid-September, 10-year German government bonds temporarily yielded more than they had for over 17 years.
Rising long-term yields make it more expensive for banks to refinance – and this in turn feeds through to higher mortgage rates.
High energy prices resulting from the war in Iran recently heightened concerns on the financial markets about prolonged inflation.
Interhyp CEO Jörg Utecht therefore does not expect the situation to ease any time soon. “Buyers should prepare themselves for rates to remain above the four percent mark for the time being,” he said.
Demand for mortgage loans falls
Figures from the German central bank, the Bundesbank, show that many potential buyers have already become more cautious.
In the second quarter of this year, demand for housing loans fell by the largest amount in three years.
At the same time, banks tightened their lending criteria. The net share of banks imposing stricter requirements rose to seven percent, up from four percent in the previous quarter.
Banks cited higher credit risks, increased refinancing costs and lower risk tolerance as reasons for toughening their lending rules.
This means that it’s not only the cost of a mortgage that is increasing – in some cases, it’s also becoming harder for potential house buyers to access the financing they want.
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The energy efficiency of a property is also playing a more important role than ever. Banks are generally providing less financing for properties with poor energy efficiency than for well-renovated ones.
Finanztip expert Eilinghoff said: “The worse the energy efficiency, the lower the value of the property tends to be.”
Refinancing getting more expensive
The rise in interest rates is not only affecting people buying property. Homeowners with a fixed-rate period that’s coming to an end are also facing more expensive refinancing.
However, after years of mortgage repayments, their remaining debt is often significantly lower than it was at the start.
As a result, Interhyp’s Kreil says the actual increase in monthly payments will in many cases be considerably smaller than a simple comparison of interest rates might suggest.
One option available to homeowners is a forward mortgage (Forward-Darlehen). This allows borrowers to lock in current interest rates for a future refinancing deal. Banks charge an additional premium for this.
Whether it’s worth it depends on how interest rates develop over the coming months. And there are currently many uncertainties: if the Iran conflict eases, energy prices will likely fall significantly. This would dampen inflationary pressure and could push bond yields down – and, as a result, lower mortgage rates as well.
Experts advise homeowners not to rush into anything without extensive research.
“If I still had another year to go, I wouldn’t take out a forward mortgage immediately. I’d rather wait a few more weeks or months. That would still be early enough,” said Eilinghoff.
Disclaimer : This story is auto aggregated by a computer programme and has not been created or edited by DOWNTHENEWS. Publisher: thelocal.de
