The European Central Bank building in Frankfurt am Main, Germany. (berlinlapse/Envato)
The European Central Bank (ECB) took another cautious step in September, cutting the main refinancing rate from 3.75% to 3.5%. While the move was anticipated, its ripple effects are still being felt across the German real estate market, particularly for property investors and homeowners. With mortgage rates continuing their gradual descent, many are asking: Is now the time to act, or should we wait for rates to fall further?
Currently, the average building interest rate for a 10-year fixed-rate loan hovers at 3.36%, down from the peaks of 4.2% last year, according to data from FMH Finanzberatung. Demand for mortgages has seen a notable surge as a result. Barkow Consulting reports that new mortgage loans in July reached €19.5 billion, the highest level in two years, driven by the recent drop in rates.
Max Herbst, CEO of FMH Finanzberatung, points out that some of the best mortgage deals are now being offered below 3%, especially for borrowers with a loan-to-value ratio around 50%. “With top brokers, we’re already back below 3%, but don’t expect rates to drop back to 2% anytime soon,” he notes, urging cautious optimism. Though rates have softened, he reminds us, “they’ve already priced in much of the ECB’s anticipated moves, and further reductions, while possible, will likely be incremental.”
How does the ECB's rate cut affect mortgages?
While it might seem intuitive that the ECB’s base rate directly influences mortgage rates, the reality is more complex. Michael Neumann, CEO of Dr. Klein, clarifies: “Building interest rates aren’t directly linked to the ECB’s key interest rates. Instead, they’re influenced by the yield on 10-year German government bonds, which reflect broader market conditions, such as inflation expectations, economic outlook, and investor confidence.”
In short, mortgage rates follow a different path. “The ECB rate cut has already been priced into mortgage rates,” Neumann adds. Ralf Umlauf, bond expert at Landesbank Hessen-Thüringen, reinforces this: “The ECB's moves were expected, and the overall reaction in the bond market has been muted.” Meanwhile, Jörg Krämer, Chief Economist at Commerzbank, reminds us that "the money market rate, influenced by surplus liquidity from the ECB, is more decisive for capital market interest rates than the main refinancing rate."
In other words, while the ECB’s actions provide a framework, they don’t drastically move the needle on mortgage rates. As a result, building interest rates are more influenced by the broader economic environment—particularly inflation trends and investor sentiment.
Where are mortgage rates headed?
Looking ahead, most experts agree that mortgage rates are likely to remain stable, with only minor fluctuations. Max Herbst envisions rates creeping up slightly by the end of the year. “We could see building interest rates tick up to 3.5% or slightly higher if inflation trends upward,” he says. However, these changes are expected to be modest compared to the rate swings seen last year.
Baufi24 echoes this sentiment. Co-CEO Oliver Kohnen expects rates to stay between 3.0% and 3.5% until the end of the year, barring any major shocks. “External factors like volatile political developments remain hard to predict, but from today’s perspective, we don’t expect any drastic drops or increases in the near term,” Kohnen says. Essentially, the wild ride of 2023 seems behind us, and while 2% mortgage rates remain a distant dream, we can expect a period of relative calm.
What should buyers and homeowners do now?
The big question on many prospective individuals' minds is whether to buy now or wait. Here, the experts are mostly in agreement: Now is a good time to act, particularly with property prices showing signs of recovery.
Max Herbst warns against waiting for lower rates. “Anyone who delays their property purchase now in the hope of further interest rate cuts could quickly come under pressure due to rising property prices,” he explains. Indeed, the most recent data from Barkow Consulting shows new mortgage lending surged 26% in July compared to the same month last year, suggesting buyers are already jumping at the opportunity to secure financing while rates are favorable.
For first-time buyers, the message is clear: don’t speculate. As Michael Neumann from Dr. Klein explains, “Many people feel that they shouldn’t speculate on falling interest rates, especially with property prices likely to rise again.” The rental market is tightening, and with property supply constrained, waiting could mean paying more for the same home next year. The old adage “a bird in the hand is worth two in the bush” seems apt here.
For homeowners nearing the end of their fixed-rate period, the situation is different. Mirjam Mohr, Head of Sales at Interhyp, advises starting the refinancing process early. “Begin planning at least 12 months before your fixed rate expires,” she says. While interest rates are favorable, Mohr emphasizes that the current low window “won’t stay open forever.” For those fortunate enough to still be in the low-interest phase, delaying refinancing could cost them dearly if rates climb again.
Oliver Kohnen at Baufi24 also underscores the urgency for potential buyers: “The window of opportunity is wide open right now thanks to more favorable financing options than a year ago, but this window could close next year as property prices rise.” Simply put, the combination of lower rates and rising prices is a signal that now is the time to act.
Property prices: back on the rise
Adding to the urgency is the fact that property prices are climbing again, particularly in the residential sector. Reiner Braun, CEO of Empirica, notes, “The ECB interest rate cut is more of a positive signal for sellers than buyers, as prices are more likely to rise.” Recent figures from the Kiel Institute for the World Economy show property prices rising across the board in the second quarter of 2024 for the first time in two years, with condominium prices up 2.4% and apartment buildings up 4.4%.
While financing conditions remain attractive, the rising prices could eat into any savings made from lower interest rates. “The time for bargain hunters is probably over,” Braun cautions.
REFIRE: The recent ECB rate cut may not have revolutionised mortgage rates, but it has certainly helped stabilise the market. With building interest rates hovering around 3.36% and expected to remain stable for the rest of 2024, the general consensus is clear: potential buyers should act now, while those looking to refinance have some breathing room.
