The level of interest rates is extremely important to mortgage lenders, as they indicate how expensive borrowing is overall. With low interest rates, larger sums can be easily financed, and the repayment installment can be increased accordingly to achieve faster debt relief. Germany and Europe are currently experiencing a period of low interest rates, as the European Bank lowered its key interest rate in March 2016 to 0.0 percent. Even long-term investments hardly offer higher returns. Experts do not see any major changes at this time, so that favorable terms for real estate lending business are likely to be expected in 2018 as well.
What the interest on mortgage lending depends
When talking about the level of mortgage interest, many people first look at the key rate of the European Bank, which is also present in the media. It indicates the conditions on which banks in Europe can make short-term use of central bank funds. A low base rate always means low costs for the banks. However, the market for real estate lending interest is less oriented to short-term yields, but rather to long-term investments such as Pfandbriefe or bonds. Finally, real estate loans are refinanced on a long-term basis. But here, too, a low interest rate has been seen for months, because the relationship between supply and demand is negative. And this despite the fact that German government bonds in particular are in high demand among investors due to the first-class creditworthiness of the German government. Mortgage customers, however, are pleased about this development, because as the banks can refinance at low interest rates, lending rates have also fallen. Currently, it is possible to obtain ten-year real estate loans with an effective interest rate of 1.4-1.6% per annum.
The interest rates for real estate financing depend on this:
- Monetary policy decisions of the central bank
- Conditions and rates of long-term fixed income securities
- The creditworthiness of the debtors
In addition to the important monetary policy decisions of the EB, which are undoubtedly enormously important for finding a condition for mortgage lending, the creditworthiness of each individual also plays an important role. When determining creditworthiness, which is also called creditworthiness, banks check the likelihood that the loan can be repaid. Among others, the following factors are checked:
- Amount of revenue and expenditure
- Determination of the budget surplus
- Reviewing the data of Private credit
- Value of the property, which is available as security
The most important criterion for the creditworthiness of a customer is its budget surplus, because this money will be used to finance the later credit installment. Only if this is high enough and a certain liquidity reserve can be formed, lending is possible. But also the data of the Private credit and finally the value of the property are important. Since the property is used as collateral, its value must at least equal the amount of the loan. The banks carry out a valuation, which is created according to their own specifications.
The interest rate decisions of the central banks around the globe
Of course, the most important criteria for interest rate developments in Germany are the decisions of the European Bank. The current chairman, Mario Draghi, and his team decide monthly on the continuation or termination of monetary policy, based on economic developments in Europe and the associated inflation. The EB is aiming for inflation of around two percent, which has not been achieved for several months. In order to stimulate the economy, key interest rates were reduced to 0.0 percent in March 2016. At the same time, a negative deposit rate of -0.4 percent was introduced. Banks who now deposit money with the EB because they can not currently issue it as a loan, have to pay money. This should encourage the banks to issue more loans to companies and individuals. If this capital is then invested in the economy, it should grow again. To make the effect even stronger, the EB buys bonds to make this money available to the economy. This increases the money supply, supply exceeds demand and interest rates fall.
The EB’s current monetary policy measures:
- Buying bonds for a higher amount of money
- Key interest rate of 0.0 percent
- Negative interest on bank deposits
Not only the decisions of the European Bank are important for the development of interest rates in Germany. The decisions of other central banks around the globe must also be taken into account. Particularly important at the moment are the decisions of the Fed, the US Federal Reserve. In the US, the central bankers have already moved away from the zero interest rate policy and have raised the key interest rate in small steps. Although this development has not yet passed to Europe, this can certainly happen with positive economic data.
Expectations on mortgage interest rates in 2018
The year 2018 has started very quietly in the field of mortgage interest. Although these increased slightly by ten basis points in mid-January 2018, there has been a sideways movement on the market for weeks, which may well be maintained for some time. However, over the course of the year, this assessment could change, especially against the background of the following:
- further rise in key interest rates in the US
- Exit of the EB from the expansive monetary policy
- Rise in the base rate in the euro area
EB President Trigha has not yet decided on an end to the low interest rate policy at the January meeting. However, he sees the economic development in Europe slightly positive for the first time. However, inflation still falls short of expectations at around 1.4 percent, even though it has already reached 1.7 percent in Germany. Should this trend continue, however, the current bond purchase program, which is approved until September, could be suspended. With further consolidation and rising inflation, it would even be possible for the EB to make a first positive interest rate move already at the end of 2018 or at the beginning of 2019. At the latest then also the mortgage interest will react and rise.
At the conclusion of mortgage lending compare at rest
Since interest rates are currently very low and hardly any changes are expected in the coming weeks and months, interested parties should not react too quickly when concluding mortgage lending. It is important to review the offers of the banks in peace and compare. Despite low interest rates, not all institutions offer really low interest rates, which may be due to the different valuation guidelines of the properties and customers. But business policy decisions and of course local competition also play a role. In addition, the terms of direct banks are often lower than those of local branch banks.
Tip: Take the opportunity and compare different mortgage lending offers. And not only in terms of interest rates, but also the other agreements such as special repayment options or redemption variants.
If you are looking for a mortgage, you do not necessarily have to arrange it with your own bank or savings bank. Many institutions offer real estate loans, including financial advisors, who can resort to several offers from different banks. Possibly also the combination of mortgage loan and Construction loan contract would be meaningful, because with such constellations it is possible to agree on the interest binding up to the end of the term. Here, however, the individual case and the individual life situation have to be considered. In any case, funding should be compared against the APR, which indicates how much the overall cost burden will be. But also special conditions such as the special right of termination or the amortization option should, as mentioned above, not be disregarded.