German borrowers have seen interest rates for property loans double over the first three months of this year, with interest rates on ten-year fixed-term loans rising from 1% to almost 2%, as a result of high inflation and expectations of an imminent end to the European Central Bank's loose monetary policy. This is the fastest rise in mortgage interest rates at any point over the last ten years.
The one consolation potential buyers of residential property had over the past few years, faced with steadliy rising property prices, was that at least the interest rates were low, which compensated for the galloping price rises somewhat. Now borrowers who are desperate to buy property before it escapes out of their reach altogether are now looking at higher monthly expenditure on their mortgage repayments - in some cases, considerably higher.
On a mortgage loan of €300,000, the borrower is faced with an increase of about €200 per month, or about €24,000 more over the fixed ten-year period, according to mortgage broker Interhyp. Coming at the same time as millions of households are getting a nasty shock from their energy and utility providers, reports are reaching us at REFIRE of desperate potential buyers calculating and re-calculating their financial flexibility for the coming years, all while trying to find an affordable place somewhere where they would like to live.
As we report elsewhere in this issue, recent new constraints on bank lending for residential purchases are only likely to add to the strain on bank lending conditions, likely to add even further to bank interest charges. After price rises nationwide of more than 11% on average, fears that prices are headed even further upwards have led to widespread speculative buying, further decoupling the investment market from the market for residential rents, which saw rises of about 2.5% last year on average.
A shortage of building land zoned with planning permission is adding further fuel to the fire, along with widely circulated reports of the soaring costs of building materials due to material and labour shortages. All of this is leading to an unprecedented boom for loan extensions among existing borrowers, and for forward loans to lock in still-modest lending rates before they rise even further.
According to Mirjam Mohr, board member with responsibility for private clients at mortgage broker Interhyp, the share of forward loans among borrowers looking to extend their loan agreement with their banks has risen 4% to 49% since the beginning of the year. Given the likely direction of interest rates looking forward, many property owners with four to five years on their current fixed-term agreement are already looking to lock in today's rates for financing required down the line, and are prepared to pay a forward premium to get that rate.
A forward loan can only be got five years at the earliest before the expiration of the existing fixed loan period, and at the latest six months before. Borrowers who haven't yet found a property to buy can't avail of forward loans - it's a facility only available to borrowers seeking to extend, or to change their mortgage lender. Depending on the duration to exercising the forward loan, the premium for 24 months is 0.23% and for 36 months, the borrower will pay 0.36%, according to Max Herbst of FMH-Finanzberatung in Frankfurt. Locking the rate in 60 months in advance (five years) will cost 0.61%.
Michael Neumann, the boss of nationwide mortgage broker Dr. Klein, said that the markets were currently in a state of nervousness as a result of the geopolitical situation, which could lead to volatility in the coming weeks and months, and sudden movements in mortgage interest rates, both up and down. Both Neumann and FMH's Herbst are pretty convinced that the cost of mortgage finance is going up over the next couple of years, to north of 2% at the least.
Herbst gives a concrete example in a recent article in business daily Handelsblatt. Anybody who had a loan of €400,000 with a ten-year fixed interest rate and an effective rate of 0.75% before the beginning of January 2021 and has a monthly mortgage repayment of €1,250, still has a residual debt of €275, 425 to repay at the end of the ten-year term.
If you signed a loan with an effective interest rate of 1.63% this week and pay the same amount month after month, you will have a residual debt of €307,578 at the end of the ten years - fully €32,153 more. Not an amount that should rush an investor into taking a major life-decision overnight, but a difference that is likely to get bigger as interest rates continue their upward rise. That's what's helping to still drive real estate prices upwards.
Much will now depend on how the ECB reacts to the Ukraine crisis and rising inflation - Germany's inflation rate is currently above 7% - and whether we enter a long period of stagflation. The traditional German saver with his money in the Sparkasse is unlikely to see any meaningful reward on his Sparbuch for quite a while, no matter what happens.
And while there is no guarantee that real estate always acts as a hedge against inflation, it is true that inflation eats away at the outstanding debt, and the borrower's fixed monthly repayments do not rise over the period of his loan, whereas a tenant is faced with rising rental payments, often linked to the Consumer Price Index. Demand for mortgage finance is set to remain strong, and borrowers will just have to pay more to access stable rates.
