Mortgage interest rates are well below last year's peaks
Ever since the European Central Bank left its main interest rates unchanged in December, speculation has been rife that the only way for rates from now on is down. This is by no means a certainty, and they could remain at current levels or move sideways for longer than people expect. Nonetheless, mortgage interest rates are undoubtedly coming down and are well below last year's peaks, which will give some relief to property borrowers.
A new study by comparison portal Check24 shows that property buyers with a very good credit rating have been able to avail of mortgage rates that have now fallen below 3%. This implies considerable savings for borrowers.
In the first week of January, the best rates available on a ten-year property loan were 2.93% - that is 0.36% percentage points lower than December 1st 2023, a month earlier.
Check24 cites an example of a borrower of a home loan of €400,000 at the 2.93% rate, who will incur interest costs of €104,569 at the end of the ten-year period, and will pay a monthly instalment of €1,643. This represents a saving of €120 per month, or €12,673 over the period, if borrowing at last month's rate of 3.29%.
Brokers' views
Ingo Foitzik, managing director for mortgage finance at Check24, says, "The lower yields on ten-year German government bonds and easing inflation are causing construction interest rates to fall, with the banks having already priced in this development." However, Foitzik said he did not expect the trend of falling building interest rates to continue. We expect a sideways movement rather than sharply falling interest rates in the coming weeks", he said.
His view was shared by Michael Neumann, CEO of credit broker Dr. Klein, who also sees a sideways trend in building interest rates for the coming year. "I'm assuming that we will be in a corridor of 3 to 4 per cent for a ten-year fixed interest rate - in my opinion, smaller fluctuations will be more likely to go down than up," he said.
The fall in building interest rates has been about 0.8% since October, in line with the yield on ten-year German government bonds, or Bunds. It had been as high as 4.22%. In Germany, building interest rates are linked to the yield on ten-year federal bonds via the yield on mortgage bonds, which has recently fallen from more than 3% to about 2.2%.
The yield on German government bonds, in turn, is influenced by a variety of factors, including the ECB's monetary policy, the economic outlook, investors' inflation expectations, investors' risk appetite and interest rate trends in other currency areas.
DB Research see hopes for greater 'affordability'
Meanwhile, Deutsche Bank researchers (DB Research) led by analyst Jochen Möbert, see mortgage interest rates continuing to dip, but to rise again (to 3.8%) towards the end of the year due to ongoing inflation, remaining above 2%.
This should, however, lead to greater affordability of home prices through the year, on a house price to income ratio. Nominal disposable income increased by around 5% in 2023 (2022: 5.6%). However, the fall in purchase prices compared to the all-time high (decline of between 11% and 6% in 2023) could increase affordability in 2024, the researchers say.
Given the projected low level of housing completions, expected to be about 212,000 units, the housing market will remain tight. DB Research suggests that the housing shortage could even last a decade, given the projected rise in the population of 670,000 to around 85 million inhabitants for 2023. The 86 million mark will be reached by 2030, they forecast.
