September 25, 2019

Never cheap again? The construction interest is significantly higher

Cheap real estate loans

Cheap real estate loans

The times of cheap real estate loans could be over for a long time. The interest rates on loans with 10-year fixed interest rates have risen by almost 70 basis points since their low in August. The uptrend could continue to solidify, turning the dream home back into an expensive affair.

In the past year, interest rates on real estate loans in Germany were unnaturally low. Experts explain this with an anomaly on the financial markets. The highest-rated interest-bearing securities, which include German government bonds, had rallied record-breaking.

Bond market prices

Bond market prices

Rising bond market prices are synonymous with falling interest rates. Banks refinance real estate loans via the bond market, so that low interest rates are quickly reflected in the conditions for mortgage loans.

One reason for the rise in prices was the financial problems of countries such as Greece and Portugal. Investors fled for fear of a national bankruptcy in so-called “safe haven”, such as federal securities. The demand for these assets pushed prices and pushed interest rates.

Several reasons now argue that builders and owners have to dig deeper into their pockets for their loans. For one, market participants’ inflation expectations are rising steadily. Among other things, this is due to the forced easy monetary policy of the European Centrum Bank. On the other hand, the markets will no longer allow states such as Germany to face any risk of financing difficulties. That does not have to lead to very high interest rates. But last year’s very low interest rates are no longer realistic.

Construction or acquisition project

Construction or acquisition project

If a construction or acquisition project or follow-up financing is available, a loan can be used to secure the currently favorable conditions for a future loan. Forward loans are available with up to 5 years lead time. As the duration of the forward period increases, so does the premium on the interest rate.

For an additional surcharge, forward loans with cancellation rights are also available. The right of cancellation makes sense for borrowers who, in the case of falling interest rates, do not want to be obliged to maintain an expensive loan. After all, no one can actually predict the development of interest rates.

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