The first months of 2022 point to a sustained turnaround in interest rates for construction financing. While interest rate increases were observed last year, which were usually followed by declines, it has become apparent since the beginning of the year that interest rates for construction financing are now moving upwards on a sustained basis. While the Zinsvergleich Zins-Kommentar forecast last year still assumed stagnating construction financing interest rates at a very low level, there are now clear signs of an interest rate turnaround on the construction financing market. Many builders are therefore trying to secure the current interest rate level still quickly. The Federal Reserve has already completed the turnaround in interest rates in mid-March, raising the key interest rate in the U.S. for the first time since 2018. The European Central Bank is already hinting that an increase in key interest rates is also imminent in Europe.
Interest rate commentary 2. Quarter 2022: Inflation and key interest rate
According to the Federal Statistical Office, the inflation rate in Germany was already 5.1 percent in February – due to further increases in energy prices. In the euro area it was 5.9 percent. ECB chief Christine Lagarde has already said that inflation in the euro zone of up to 10 percent is conceivable. Loan interest rates in construction financing have risen significantly this year – currently they have reached the level of 2018. On average, just under 2 percent is currently being demanded for a 10-year fixed-interest period. For 20-year terms, the 3 percent mark is within reach. Two years ago, borrowers were still receiving historically favorable rates of 0.62 and 0.89 percent, respectively. The jump in interest rates in recent weeks is therefore remarkable.
Nevertheless, the level is still low at present. In 2011, an average of 4.2 percent had to be paid for a 10-year fixed interest rate and 4.70 percent for a 15-year fixed interest rate. But: since then, real estate prices have risen sharply in some cases. In parallel, there was also an increase in household incomes. In short, for well-off households, buying a property is still feasible without having to take too much of a risk. Due to the current events in Ukraine, the still present pandemic and the rising inflation rate, a further forecast is extremely difficult.
However, the interest rate level will not become more favorable for the time being. Therefore, now is the time for all first-time financiers whose interest-linked contracts are due to expire in the next 2-3 years to start looking at follow-up financing now. In addition, rescheduling is generally possible ten years after disbursement of a loan, with a notice period of six months. Many building borrowers who do not yet have a special right of termination can also secure interest rates up to five years in advance with a forward loan. Forward loans, which played almost no role in recent years, now already account for almost 12 percent of all follow-up financing. With a further upward trend.
What is the ECB planning?
The European Central Bank (ECB) announced a cautious normalization of monetary policy in March 2022. However, it does not intend to move as quickly as the U.S. Federal Reserve (Fed). The intention is to end the bond purchases in the summer – with the addition of "when the situation is right". And "some time after" the interest rates are to be raised.
The ECB's announcement is based on forecasts which, however, have uncertain foundations: The ECB will stop its bond purchases in around six months, as the economy would then pick up again in the summer at the latest after a sharp setback caused by the Ukraine war and the Russia embargo Inflationary pressure will remain high until the summer of 2022, according to the ECB's assumption, but will then stabilize at this higher level. One expects then an increase of the yields of the federal loans with ten years term of 0,38 on at least 0,7 per cent to the end of the year.
Interest rate commentary: what bonds have to do with the construction loan interest rate
The interest rate trend of federal bonds with a 10-year term is linked to the mortgage interest rate. If the yields rise, also the interest rate for the mortgage financing rises – around conversely.
The upward trend in bond yields began this year and appears sustainable. The interest rate turnaround actually already began in the last quarter of the previous year. First, inflation expectations in the bond market have risen steadily. They formed the basis for the ECB to adjust its monetary policy accordingly. In further consequence now rising real interest rates are to be expected. These generally increased with higher expectations for monetary policy. An interest rate increase of 25 basis points is expected by money market experts at 100 percent and a further increase of 80 percent.
In addition, higher inflation expectations and the likelihood of a key interest rate hike have already caused yields on ten-year German government bonds to rise from a previous minus 0.4 percent in December 2021 to the current level of almost plus 0.4 percent.
Building interest rates have already reacted to the rise in bond yields: since the beginning of the year, interest rates for loans with ten-year fixed interest rates have risen by approx. 1 percent increased on average. A rise that no expert expected in this short second space last year. The basis of this increase is the inflation rate increase, which was not expected at the time, and the quickly following announcement of a possible change in central bank policy. In plain language, this means that for real estate buyers with an average financing requirement (300.000 euros at 70 percent loan-to-value), the monthly installment for interest and repayment on an annuity loan now rises by ca. 250 euros a month.
What first-time financiers should do
If one follows this Zins-Kommentar, the following scenarios are realistic: The interest for building financing loans will continue to rise. Whether it comes to a rapid increase, is serious not to predict. The development at a level that is still moderate in a decade comparison nevertheless leaves room for prospective real estate buyers to plan their purchase and financing in a considered manner. A special attention is to be directed however to the own capital portion of the financing. Particularly favorable interest rates and thus favorable financing can only be obtained if one can contribute at least 20%, but better 30%, of one's own funds. With this in mind, loan financing remains favorable by historical standards. Of course, in times of rising interest rates, it is advisable to aim for the longest possible fixed interest rate on the contract. Thus one secures the favorable financing on a long-term basis and does not have to have fear of a later, very expensive follow-up financing. Banks charge higher interest rates for particularly long-term contracts. But it still pays off.
Interest commentary action recommendation for the follow-up financing
Those who are currently already servicing a construction loan should not wait. As a first step, analyze the current contract and examine the possibilities of a special right of termination, a debt rescheduling and early follow-up financing. For those who can now take out the longest possible follow-up financing at the currently still very favorable interest rates should also do so. Bank-independent construction financing brokers such as accedo AG can help you with this. Take advantage of the free consultation offer and find together the best solution for a long-term, low-interest and thus secure continued financing of your current construction loan.
Reschedule a current mortgage loan? Difficult, but doable if you know the terms and find smart solutions.