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The European Central Bank’s latest rate cut has brought some relief to financial markets, but for German homebuyers, it offers little cause for celebration. While expectations were high that lower key interest rates would translate into cheaper mortgage financing, the reality is more complicated.
The ECB’s decision to cut the deposit rate to 2.75% marks its fifth reduction since last summer, with further cuts expected this year. However, mortgage rates in Germany are not dictated by ECB policy alone. Long-term borrowing costs are primarily linked to Bund yields, which have been rising rather than falling in recent months. Despite the ECB’s easing stance, interest rates for mortgage loans have remained stubbornly high, and in some cases, have increased.
“For homebuyers, this means mortgage financing will not get much cheaper this year—at best, it will stagnate or rise slightly by the summer,” says Christoph Rieger, head of bond research at Commerzbank. “By the end of the year, German government bonds are likely to yield around 2.6%, which will put upward pressure on mortgage rates.”
Currently, the most competitive ten-year fixed-rate mortgages are available at around 3.49%, with some lenders offering as low as 2.95% under strict conditions. For loans with a 15-year fixed rate, borrowers are looking at closer to 3.6%. These rates remain well above pre-pandemic levels and are unlikely to decline significantly despite continued ECB cuts. The reason is that global bond markets are reacting to broader economic forces, including expectations of higher inflation in the United States and potential trade disruptions under Donald Trump’s administration.
Rising loan amounts and shrinking equity are keeping borrowing costs elevated
A key factor keeping borrowing costs elevated is the rising loan amounts sought by German homebuyers. The average mortgage loan in October 2024 reached €313,000, an increase of €26,000 year-on-year, according to data from financing broker Dr. Klein. Buyers are not only borrowing more but also putting down less equity, pushing the average loan-to-value ratio to 88.1%—the highest recorded in recent years. “The demand for property loans is increasing, but so is the level of risk borrowers are taking on,” warns Dr. Klein’s CEO, Michael Neumann. “Households are stretching their budgets further than before.”
For those considering a purchase, the biggest question is whether to fix mortgage rates now or wait for further ECB cuts. Some borrowers are opting for shorter fixed-rate periods, betting that interest rates will fall further. However, analysts caution against this approach. “The risks of higher rates in the second half of 2025 are real,” says Elmar Völker, an analyst at Landesbank Baden-Württemberg. “With the US Federal Reserve pausing its rate cuts and inflationary pressures expected to pick up again, we could see bond yields climb, pushing mortgage rates higher.”
Political uncertainty adding further layer of risk for borrowers
Another significant risk comes from the political environment. Trump’s return to the White House has already rattled global markets, with fears that new tariffs and fiscal stimulus could reignite inflation in the US. “Trade conflicts with the US could put additional pressure on the weak eurozone economy,” says ECB director Isabel Schnabel. “This would weigh on growth and potentially limit how far we can cut interest rates.”
Domestically, the upcoming German elections on 23rd February 2025 add another layer of uncertainty. Depending on the new government’s stance on fiscal policy and housing regulation, mortgage rates could be affected by shifts in investor sentiment and government bond issuance.
For homebuyers, timing and strategy will be key. While mortgage rates remain historically attractive compared to the highs of 2023, they are unlikely to decline significantly in the short term. The advice of many is that those looking to buy should prioritise securing competitive deals now rather than waiting for uncertain future rate cuts. With house prices beginning to rise again and economic volatility on the horizon, locking in a favourable fixed rate today may prove a more prudent approach than gambling on further declines. In the words of Mirjam Mohr of Interhyp: “2025 is a good year to buy—but only for those who are well-prepared.”