The dream of owning your own home is far away

The turnaround in interest rates has been here for a long time: construction interest rates are rising significantly and making real estate purchases significantly more expensive. t-online explains what builders need to prepare for now and how best to finance homes.

Lack of building materials, few craftsmen and expensive building land: anyone who wants to build a house now has much more difficulty than before. In addition, there has recently been a significant increase in construction interest rates, which makes financing your own home much more expensive.

“For the weeks and possibly months to come, home buyers must therefore reckon with the possibility that mortgage interest rates will tend to continue to rise,” says Michael Neumann, CEO of mortgage broker Dr. Small, t-line.

The expert therefore advises that construction financing should be “designed to be solid and not to be pushed into the hasty purchase of a property which, on closer inspection, turns out to be worthless”. A banking comparison can help. But what else should homeowners pay attention to – and why are interest rates rising so sharply in the first place? t-online answers the most important questions about the boom in construction interest.

What are interest rates currently?

Currently, the average interest rate on ten-year standard loans is 2.12%, which is a doubling since December, according to the Frankfurt-based FMH Finanzberatung. This is the biggest jump since 1999. But to get the big picture, interest rates were between 5 and 6% at the time. Despite the significant increase, conditions are still more favorable today than they were a few years ago.

Real estate financier Interhyp also determined the same upward trend. For ten-year loans, Interhyp expects construction interest to rise further to 2.5-3% by the end of the year. According to a recent report, in March such funding increased by about 0.5 percentage points from the previous month. Although experts were expecting construction interest rates to rise this year, current values ​​exceed those estimates.

An example calculation shows the effect that even a small change in the interest rate can have on financing: with a loan of EUR 400,000, an increase in the interest rate of 0.25 percentage point per year leads to higher costs of EUR 1,000, calculated over ten years there is an additional charge of EUR 10,000.

What does the ECB have to do with the increase?

The European Central Bank (ECB) under the presidency of Christine Lagarde specifies the so-called environment of interest rates via the key rate. If it raises the key interest rate, commercial banks have to pay more for a loan. They pass on these costs to their credit customers in the form of interest.

Although the ECB has yet to announce the interest rate hike, there are signs that the zero rate phase will end for the foreseeable future. Nevertheless, Michael Neumann says of Dr. Klein about the interest rate construction: “We are currently in a very dynamic environment: interest rates have risen unusually in a very short time this year and are subject to to strong fluctuations.

Construction interest is based on federal bond yields. Last week they hit their highest level since mid-2015, climbing to 0.84%. This development, in turn, is linked to the general rise in interest rates in Germany and the whole of the euro zone, largely influenced by the ECB.

ECB President Christine Lagarde: Despite the high inflation rate, the European Central Bank is sticking to its zero interest rate policy. (Source: Political Moments/imago images)

Its mandate is to bring rising inflation under control again by tightening its ultra-accommodating zero interest rate monetary policy. In March, prices in Germany increased by 7.3% compared to the same month last year. The situation is similar in the United States, but while the US Federal Reserve initiated the reversal in interest rates in March with a first rate hike, the European Central Bank has so far refrained. After setting interest rates on Thursday, ECB President Christine Lagarde announced that she would continue to adhere to the zero rate policy.

For experts Neumann, “the current level of interest rates can only be justified with rational arguments”. On the contrary, there are a whole series of uncertainty factors due to the unpredictable economic consequences of the war in Ukraine, the new corona closures in China and the resulting supply chain failures. Financial markets are “extremely nervous and interest rates are volatile”.

“The current ECB decision will not change that: as long as the ECB keeps all options open and does not make it clear when the first rate hike will take place and what the outlook is, markets will lack guidance and predictability. said Neumann zur Decision to stick to the zero interest rate policy.

For savers, the situation is currently doubly bitter: loans become more expensive, but their bank deposits continue to earn no interest or are even charged at negative interest.

What can home builders do now?

“Anyone who needs a loan should prepare in advance, compare terms now and calculate the effects of a further interest rate hike for themselves,” advises Mirjam Mohr, director of private clients at Interhyp. She recommends a rather higher initial repayment and longer fixed interest rates.

With the intermediary of Dr. Petit is already noticeable. Home buyers are increasingly choosing longer fixed interest rates of 13 years and ten months, he said. “Now is a good time for owners to take care of follow-up financing – even if it’s only due in a year, two or three years,” advises Michael Neumann, expert at Dr. Petit.

Loan broker Baufi24 also refers to term loans, with which homeowners can secure the interest on follow-up financing for up to five years in advance for an additional fee. Read here for whom such a form of financing can be interesting.

For some, the higher costs could put an end to the dream of owning a home for the time being. Real estate and construction prices have increased significantly in recent years, partly because real estate is considered a good investment. Favorable interest rates made financing possible for many buyers and builders. As interest rates rise again, residential real estate prices have also continued to rise – by around eleven percent in 2021 alone.

According to Ditmar Rompf, CEO of construction financier Hüttig & Rompf, the days when many people could still afford a property thanks to cheap financing are now over. Even a small increase in interest rates can significantly increase the monthly charge. “That may be too much for some households if construction financing was too tight.”

Leave a Comment