Frankfurt It was dream conditions – but their time is running out. At the beginning of 2020, real estate buyers were still able to secure mortgage interest rates well below one percent with a ten-year fixed interest rate. Consumers can only long for that at the moment. In view of the looming turnaround in interest rates, interest rates for real estate loans have risen more sharply in a short time than they have in many years – which is now forcing borrowers to act.
According to current data from the largest German real estate finance broker Interhyp, the demand for follow-up financing and so-called forward loans, which fix interest rates in advance, increased significantly in the first few weeks of the year. “The proportion of follow-up financing across all financings has risen by six percentage points to 31 percent since the beginning of the year compared to the previous year’s average,” reports Mirjam Mohr, Interhyp’s board member for private customer business, on Tuesday.
At the same time, the proportion of financing with forward loans among follow-up financing increased by four to 49 percent. “Due to the prospect that the level will not become cheaper for the time being, many owners are concerned with their follow-up financing,” says the real estate financier Dr. Small.
With an advance loan, property owners secure the current interest rates, even if the loan is only needed in three or five years. However, this security has to be bought with additional burdens. The earlier the contract is concluded, the more expensive the forward premium that the bank charges.
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Nevertheless, more and more Germans are currently trying to secure their construction financing and avoid a possible further increase in conditions. “This is a clear sign that it is important to a large number of our customers to secure the current interest rates in the long term,” says Mohr.
Only recently had construction interest exceeded the 1.5 percent mark for loans with a ten-year fixed interest rate. Builders currently have to factor in interest rates of between 1.5 and 1.6 percent for five- and ten-year loans, and around 1.9 percent are due for loans with a 20-year fixed interest rate.
However, the conditions are still comparatively favorable. In the 1990s, consumers had to pay just under 10 percent interest on a home loan, and even six years ago it was still mostly over 2.2 percent. As a result, the interest rate level for real estate buyers is currently still comparatively low.
Inflation drives the trend
Inflation, which has remained at a high level for months, is considered the driving factor for the rise in interest rates for building loans. The latest figures point further upwards: In Europe it is currently 5.9 percent, in Germany inflation climbed to 5.1 percent in February. At the same time, the corona pandemic has lost momentum, which increases the pressure on the central banks to end their loose monetary policy.
Michael Voigtländer from the Cologne Institute for Economic Research (IW) is not sure whether the markets have already anticipated too much. “It cannot be ruled out that we saw an exaggeration in building interest rates at the beginning of the year,” he warned. Much depends on developments in Ukraine. The decisive factor is whether the war drags on, continues to put pressure on energy prices and jeopardizes economic development, or is ended quickly and inflation falls. “There is a lot of uncertainty, and many different scenarios are conceivable – including that building interest rates will fall again.”
But most experts see no end to the upward trend in building finance. “Over the next year or two, we will almost certainly see higher interest rates for construction financing,” says Lübeck-based financing consultant Dr. Small. Max Herbst, head of Frankfurt’s FMH financial consultancy, predicts that building interest rates could soon climb above the two percent mark for ten years. What sounds like little can make a big difference for builders and real estate buyers.
An increase of one percentage point means that the total costs for an average loan of EUR 350,000 increase by EUR 29,000 within the ten-year fixed interest period, assuming an initial repayment of three percent. Even with a jump in interest rates of just 0.2 percentage points, the financing costs increase by around 6,000 euros.
A forward loan can be taken out no earlier than five years before the end of the fixed interest rate period, and no later than six months before that. As soon as the fixed interest rate of the first loan expires, the forward loan then replaces the previously existing construction financing.
However, if you do not yet own a property, you cannot conclude a forward loan agreement. This is only possible for follow-up financing or debt restructuring. Debt restructuring, on the other hand, is basically possible ten years after the loan has been paid out, even with a six-month notice period, emphasizes Dr. Small.
Security doesn’t come for free
The interest premium on a forward loan increases with each additional month until payment is made and is added to the loan interest. Herbst from FMH-Finanzberatung currently sees premiums of 0.23 percentage points for 24 months and 0.36 percentage points for 36 months.
On the other hand, anyone who wants to fix the interest rate conditions 60 months before they come into force pays an average surcharge of 0.61 percentage points. “A rush for follow-up financing does not pose a systemic risk for the banks – some of the loans have already been repaid, and the burden on households has already fallen as a result,” says real estate expert Voigtländer.
>>Read also: Here you will find an overview of the current conditions for forward loans
Interhyp warns that it is not possible to say in general whether taking out a forward loan is worthwhile: If interest rates rise by the time the loan is paid out, the borrower will benefit from the low fixed interest rate that he has already secured.
If interest rates are stagnating or falling, the forward loan is more expensive than classic follow-up financing due to the interest rate premium. “Ultimately, it’s up to you to decide whether you expect interest rates to rise or fall when your fixed interest rate expires in two, three or five years,” the experts conclude.
Many real estate buyers seem convinced that construction interest rates will continue to rise. Michael Neumann, board member of the financing broker Dr. Small, but warns against hasty shots. On the one hand, it is not certain that the rise in interest rates will continue. On the other hand, you should always take the time to compare several providers, he says.
Especially if you have only recently obtained an initial offer: “Customers who want to have the previous offer updated after a two-week break in consultation are suddenly confronted with an increase of 0.3 to 0.6 percentage points,” explains Neumann . The market environment is currently changing rapidly. Those who do not rely solely on the house bank could perhaps discover a cheaper offer from the competition.
More: How real is the risk of a real estate bubble on the German market?