Home mortgage rates will continue to fall

Current building interest

This is how building rates develop

Dirk Eilinghoff
Expert for banks and stock exchanges as of May 03, 2021

Dirk Eilinghoff

As a team leader for banking products, Dirk Eilinghoff is responsible for financial investments and old-age provision at Finanztip. He brings experience in this area from his work as an independent financial and fee advisor. In previous years, the historian and business graduate managed charitable projects at the Bertelsmann Foundation and the Körber Foundation.

  • How high the mortgage rates are depends primarily on the rates charged by the European Central Bank (ECB).
  • In the most recent meeting on April 22, 2021, the ECB left the most important key interest rate unchanged at 0 percent.
  • Building interest rates were historically low from July 2020 to February 2021. They have risen somewhat since then, by an average of around 0.15 to 0.20 percentage points.
  • The current building interest rates for standard financing are around 0.9 to 1 percent effective. The loan amount is then 80 percent of the property value, the fixed interest rate is ten years.
  • Before buying or building a property, you should check where the building interest is currently and what the current interest rate forecast looks like. You can find important information about this in this text.
  • Cheap mortgage rates alone are not a guarantee of good business. The right financing concept is more important than the last tenth of a percent for interest.
  • Talk to a consultant about the current building interest. Our recommendations for building loan brokers are Dr. Klein, Interhyp and Planethome.

In any case, mortgage rates are important information for those willing to build. Because no matter if you are a Mortgage loan for the new home or current building interest for a Follow-up financing are looking for: With low construction interest you can save thousands of euros over the years. It is therefore worth checking whether construction rates are currently rising again or could fall even further.

Where are the building rates currently?

A look at the long-term interest rate development makes it clear: The current building interest rates are as low as almost never in the recent past. Anyone who finances a house or apartment at the moment has to spend a lot less money on building finance than in the past with the same loan amount and the same repayment rate month after month.

Current mortgage rates

Fixed interest rateMortgage rate
(approximately)
Best interest rate
5 years0,8 %

0,7 %

ten years0,9 %

0,75 %

15 years1,25 %1,0 %
20 years1,5 %1,25 %

The interest rate depends on the property and creditworthiness, approximate: loan-to-value ratio: 80%, best interest rate: loan-to-value ratio: 60%
Source: Finanztip research (as of May 3, 2021)

The values ​​for mortgage interest (approx.) Are rather cautious and apply to a loan-to-value ratio of 80 percent. If the purchase price or production costs and the loan amount are closer together, the banks also charge more interest. Compared to 80 percent financing, the interest rate is then around 0.3 to 0.8 percentage points higher. In any case, tight financing is more expensive than one with a lot of equity.

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What's next with mortgage rates?

As long as key interest rates are low, consumers can assume that mortgage rates will also remain very low. In May 2021, mortgage rates are slightly above their historical lows. These were achieved after the outbreak of the Corona crisis on the stock and bond markets in spring 2020. Mortgage rates remained almost unchanged over the summer of 2020 and winter of 2021. It did not go up again until February 2021, albeit at a very low level. There can be no talk of a real rise in interest rates yet.

However, developments in mortgage rates over the past few years are no guarantee that this will remain the case for the next three to five years. As a reminder: In May 2011, property buyers could still be happy when they got a construction loan of 4 percent.

The graphic above makes it clear: The low interest rates are by no means guaranteed for the future. About ten years ago, the average building interest was two to three times as high as it is today. Real estate buyers should therefore be prepared for the fact that mortgage rates could rise significantly in ten or fifteen years before the follow-up financing.

Calculate mortgage lending

The mortgage calculator from Finanztip helps to calculate the mortgage solidly:
 

  1. You can use the mortgage calculator to find out how much you can afford.
  2. With the repayment calculator, a specific construction financing can be calculated.

What mortgage rates apply to you?

Which offer the bank finally makes to a customer for the purchase of a certain property or for a construction project depends largely on how it assesses the risk of default and the risk of liquidation. The question is whether the bank will get back the outstanding loan amount if the customer can no longer pay his installments, for example because he has become ill, unemployed or has separated from his partner.

For this reason, each bank carefully examines the customer's economic situation and the value of the property before making a financing offer.

The loan-to-value ratio also has an important influence on the interest rate offer. The loan-to-value ratio indicates the ratio of the loan amount to the value of the property. The bank gives the cheapest interest rate if the builders need a maximum of 60 percent of the property value for their construction loan.

It is important that the value that the bank applies to the house or apartment does not necessarily have to correspond to the purchase price. If, for example, the customer buys the city apartment too expensive or builds a dream villa in the country, the value applied can be well below the purchase price or the construction costs. Basically, the higher the loan-to-value ratio, the higher the mortgage interest that the bank demands.

When you have found the right property, we therefore recommend going to one of the major credit brokers. There, a financial advisor can give you the interest rate that you can achieve for your personal project.

Dr. Small
Bancassurance broker specializing in mortgage lending
  • free and non-binding advice
  • works mainly with independent consultants
  • more than 400 banking partners, including savings banks and Volksbanks
  • Telephone and on-site advice from over 550 consultants nationwide
  • Advice at the customer's home is also possible
  • specializes in mortgage lending
  • free and non-binding advice
  • works exclusively with employed consultants
  • more than 400 financing partners, including savings banks and Volksbanks
  • Telephone and on-site advice at more than 100 locations nationwide
Planethome
Mortgage lender
  • free and non-binding advice
  • works exclusively with employed consultants
  • More than 220 financing partners, including savings banks and Volksbanks
  • Telephone and on-site advice in 14 branches nationwide

How are mortgage rates and base rates related?

The interest rate you have to pay for your mortgage loan depends above all on the general interest rate level and interest rate developments: The key interest rates of the European Central Bank are therefore an important starting point for the level of mortgage interest rates. How building interest rates develop then depends above all on the interest rate policy of the ECB. When the key rate rises or falls, mortgage rates move too.

However, there is also movement in mortgage rates between the ECB's rate hikes. Because depending on which interest rate development security buyers and sellers expect, the situation changes with bonds, i.e. fixed-income securities. The mortgage banks get the money for their building loans on the bond markets.

How does the bank set the building interest?

Even if the general interest rate environment is the same for all banks, there can be big differences in the mortgage rates that individual banks offer their customers: Each bank adds its profit margin to the pure financing costs.

How high it turns out depends on the business policy and the cost situation: A bank that uses mortgage lending strategically to win new customers will (at least for a certain period of time) be satisfied with a lower profit margin than a bank that focuses on other products focused on customer acquisition.

For customers, this means that a bank that has financed the house of a neighbor or a family member in the past is not always the best choice. You can only see who is currently offering the best mortgage rates by comparing building rates. With such an interest comparison, however, interest tables and 60 percent conditions do not help. Because in addition to the financing costs and the bank's profit margin, there is a risk premium.

How are mortgage rates and Pfandbriefe related?

In order to calculate mortgage interest rates, banks use two groups of bonds as a guide: Pfandbriefe and long-term government bonds. Pfandbriefe are fixed-income securities that are characterized by the fact that they are secured by mortgages in accordance with precise legal requirements. They are therefore considered to be particularly secure, and the issuing Pfandbrief and mortgage banks have to pay a comparatively low Pfandbrief interest rate.

Even if Pfandbriefe are little known to the general public, the legal requirements for these securities are of great importance for consumers. The Pfandbrief Act stipulates that a maximum of 60 percent of the property value may serve as collateral for Pfandbriefe. The banks can therefore get money up to this limit at particularly low prices to pass it on to customers as a construction loan.

For this reason, banks like to use the 60 percent condition for their advertising. This condition is the lowest interest rate that customers can get at this bank. To do this, however, they have to bring enough equity with them that they can pay the remaining 40 percent of the purchase price and the ancillary costs for brokers, notaries and real estate transfer tax out of their own pocket.

As a particularly secure security, the Pfandbrief competes with long-term federal government bonds. Although these are unsecured, the state guarantees the interest payment and the repayment of the capital. That is why the prices and yields of long-term government bonds are an important guide for the development of mortgage interest rates.

The bond markets often anticipate interest rate hikes by the ECB: If, for example, many market participants expect interest rates to rise, the banks will have to raise Pfandbrief rates in order to be able to place bonds. At the same time, however, interest rate expectations and bond yields can also diverge: If, for example, the demand for safe German government bonds increases due to political uncertainty in other countries, their yields fall - and building loans become cheaper.

How are building interest and property prices related?

The current low construction rates have an impact that future homeowners should be concerned with. They drive up real estate prices twice: On the one hand, there is hardly any interest on secure investments such as overnight money and fixed-term deposits. In view of this interest rate development, investors are looking for other supposedly safe investments such as real estate.

In addition, demand is directly fueled by the low interest rates: the lower the interest rates, the higher the loans that consumers can afford with the same monthly charge.

This development can also be traced in numbers. According to the Bundesbank, real estate prices have increased significantly since 2010. This is especially true for seven major German cities, but now also for rural districts and urban districts:

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Consumers who want to buy their own home should also keep the development of real estate prices in mind when making their decision. If there is a turnaround in interest rates in the coming years, the effects described above could be reversed and real estate prices could come under pressure.

This can lead to problems with follow-up financing: If the value of the home is valued lower, the so-called mortgage lending run - the ratio of property value to loan - increases and thus the risk for the financing bank. It may therefore charge a higher premium in addition to the interest that has already risen.

How long should you lock mortgage rates for?

The once common practice of fixing mortgage interest rates for a maximum of five to ten years should no longer be unsolicited at the current building interest rates. Since building interest rates are currently very low, it is usually advisable to also consider a fixed interest rate of fifteen years. Despite a surcharge of around 0.5 percentage points for this long term (compared to ten years), this may be the better solution. Given the low level of interest rates, it is more likely that current building interest rates will rise again in the coming years than that they will remain constant or even fall.

With a fixed interest rate of only ten years, on the other hand, you run the risk that the mortgage interest rates will rise significantly with the follow-up financing. For example, a loan of more than 150,000 euros with an interest rate of 2 percent per year and an initial repayment of 2.5 percent after ten years has a residual debt of more than 108,000 euros, which you have to refinance with the then applicable building interest.

Even if, contrary to all expectations, mortgage rates should stay at the current level for a very long time, you do not take any risk with a long-term fixed loan rate. Because no matter how long the fixed interest period is, after ten years a legal regulation takes effect: Then every borrower in Germany has the right to terminate his loan and to reschedule at the then current building interest.

For home builders and property buyers, this means: Long fixed interest rates create planning security and reduce the risks of follow-up financing. With full repayment loans, for which the interest is fixed until the full repayment, you can even benefit from the currently applicable mortgage rates until the end of the mortgage loan.

A solid mortgage loan also includes adequate repayment. As a rule, you should calculate your mortgage in such a way that your property is paid off by the time you retire. For this you need - depending on your age - a repayment rate that is significantly higher than 2 percent. So the following applies: Take the term of the loan agreement into account when comparing offers for a home loan.

More on this in the building finance guide

  • With the right construction financing, home builders can quickly save thousands of euros.
  • Our provider recommendation: Interhyp, Dr. Small, Planethome

To the advisor

Dirk Eilinghoff

Dirk Eilinghoff

As a team leader for banking products, Dirk Eilinghoff is responsible for financial investments and old-age provision at Finanztip. He brings experience in this area from his work as an independent financial and fee advisor. In previous years, the historian and business graduate managed charitable projects at the Bertelsmann Foundation and the Körber Foundation.

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