German mortgage rates at all-time low - was this the turning point?

For those in Germany who are confident enough to plan for financing a property over the coming years, despite the current uncertainty of the coronavirus pandemic, interest rates have reached an all-time low.

Mortgage lending rates of net 0.44% for ten years fixed can be had from the most favourable lenders, according to financial services provider Dr. Klein Privatkunden - the lowest rate on record. As recently as January this lowest rate was 0.60%. These rates would apply for borrowers with very good credit ratings, and looking to borrow no more than 60% of the property value.

To put this in perspective: In comparison with a loan of €200,000 at an interest rate of 1.5% and an annual capital repayment of 3%, a rate of 0.7% and the same conditions would show a savings on interest paid after 10 years of €13,000.

According to Michael Neumann, CEO of Dr. Klein, “As long as things remain so uncertain because of the coronavirus, this new interest rate situation won’t change. We wouldn’t even rule out this record low level being broken.” This is because, as stock markets crash, investors have been fleeing in droves into government bonds, where the yields on 10-year bonds (Bundesanleihen) recently fell to MINUS 0.6%, putting them within reach of the all-time low of MINUS 0.72%. With mortgage rates tied in to the returns on long-term gilts, they too have been falling to record lows.

Mortgage broker Interhyp, in a recent release, also sees the best rates for property lending having fallen by 0.1% since February. New borrowers and those looking to further fix their loans for ten more years can frequently find lenders offering under 0.7%. Interhyp also sees a clear connection between coronavirus and the new low, low rates. “All the uncertainties surrounding the virus outbreak are having a big impact on the market, including mortgage lending”, said Interhyp board member Mirjam Mohr, responsible at the lending platform for private client business. “As the lowering of the interest rates by the Fed and the views of the European Central Bank clearly show, they’re taking this deadly seriously.” 

After the Fed recently lowered interest rates by 0.5%, Mohr believes mortgage rates will remain at the current low level for a while yet. Interhyp compares offers from more than 400 German banks for the best offers. They see plenty of offers for borrowers with good credit ratings at 0.6%, those with excellent scores and good equity should be able to get 0.4%. Likewise with Dr. Klein, the best offers are at 0.31%, while even mortgage broker Hüttig & Ropf puts the best “realistic” offer at about 0.35% Even 15-year fixed loans can be found for 0.5%, for those with excellent credit scores.

However Mohr at Interhyp and the other lending platforms dismiss speculation that mortgage lending will actually reach negative levels, apart from some special loan packages from promotional bank KfW Kreditanstalt für Wiederaufbau, where there may be under some circumstances a discount on the capital amount repayable. However, these are exceptions.

Neumann of Dr. Klein also sees little likelihood of negative mortgage rates in the foreseeable future. “The pending economic collapse will surely lead to higher risk provisions at the banks and subsequently tougher financing conditions.” However, he sees further “very attractive interest rate levels” for buyers, developers and follow-on financings. 

Still, all the lending platforms report a big fall in borrower enquiries in the last ten days, as the pandemic crisis has really begun to bite. With the imminent end of the steadily rising incomes that Germany has got used to over the recent boom years, the appetite for heavy borrowing - at any interest rate - might be going into reverse

If investors worldwide weigh up the colossal sums that Germany has had to invest to rescue its economy, it’s highly likely that demand for German government bonds will fall back, pushing up interest rates (rather than down, as evidenced recently), and thus nudging up mortgage lending rates. We might well have just briefly glimpsed the low point of mortgage rates for a good long while.