Mortgage loans are cheaper than ever before

Brexit consequences: Europe's future is uncertain, and investors are fleeing to safe-haven bonds. This is causing interest rates for mortgages to fall even further. Nevertheless, homebuyers should not rush into anything.

For property buyers, Brexit good news. At least for now. Driven by concerns about the future of the European Union, investors once again flocked to German government bonds . The high demand for security pushed interest rates on ten-year German government bonds below zero once more.

And when bond interest rates fall, this also affects mortgage rates. For several days now, interest rates for traditional mortgage loans been at a historic low. The consumer portal biallo.de reports an average offer rate of 1.26 percent for loans with a ten-year fixed interest rate. The experts at FMH Finanzberatung even measure 1.24 percent.

Other indicators also show that mortgages are cheaper than ever. Loans with a five-year term are available at an average interest rate of 1.0 percent. Borrowers with good credit and substantial equity can even borrow money for their own home at 0.75 percent interest. Mortgage rates had fallen to a similar level in April of last year.

“Since yields on German government bonds and mortgage bonds have continued to decline in recent months, mortgage rates have also reached a new historic low,” notes Marco Bargel, Chief Economist at Deutsche Postbank. The flight to German government bonds on the capital market will therefore further fuel the surge in private investors' interest in real estate.

A calculation example illustrates how inexpensive real estate financing can be: If a buyer with good credit takes out a loan of €300,000 now and pays €1,300 in interest and principal each month, they can be debt-free after just 22 years. In total, they would pay less than €30,000 in interest. However, this ideal interest rate of 1.25 percent requires a substantial amount of equity.

Assuming the property costs €400,000 and is brokered by a real estate agent for the standard 7.14 percent commission, an interesting comparison arises: Under these circumstances, the buyer would pay almost as much in commission to the agent as they would interest on the bank loan. The brokerage fee would thus be almost as high as the entire loan.

Just a few months ago, it would have taken the buyer 23 years to pay off the loan. And the bank would have received around €10,000 more in interest over the entire term. Both calculations, however, assume that interest rates remain unchanged during the loan term and that no higher interest rates will be payable after the end of the fixed interest period in 2026.

No higher interest rates in sight

For the time being, however, home builders and apartment buyers shouldn't expect a trend reversal, says Postbank's chief economist, Bargel: "Substantially higher returns are not to be expected in the coming months. Brexit could dampen economic growth in the Eurozone, while inflation remains low. Both of these factors argue against an increase in yields. Accordingly, mortgage rates will also remain close to a historic low in the coming months." Mirjam Mohr, Head of Retail Banking at Interhyp, agrees: "An imminent rise in interest rates has become less likely."

Homebuyers, therefore, have no reason to rush. According to Marco Bargel, noticeably higher interest rates are not expected until the end of the year, "as inflation should then pick up against the backdrop of the turnaround in crude oil prices." However, the price of oil is not the only factor prospective buyers should consider when assessing future interest rate trends. Many experts see no change in the European Central Bank's interest rate policy given the economic weakness in Europe. While the key interest rate has no direct impact on mortgage rates, it does ensure low refinancing conditions for banks overall, which are at least partially passed on to customers.

Some even expect mortgage rates to fall further, such as Max Herbst, head of the financial consultancy FMH. "Uncertainty in the market means a search for security. Investments in Germany will increase, and interest rates will therefore decline across the board," he says, venturing a prediction: "First of all, Brexit will lead to further interest rate cuts." Competition among mortgage lenders is also increasing, as the FMH head observes: "Since more and more home builders want long-term fixed interest rates, there is still greater scope for reductions here."

"No fixed lower limit for mortgage interest rates"

But how much further can mortgage rates fall? Can banks afford to offer loans cheaper than 0.75 or even 0.5 percent? Postbank expert Bargel declined to commit to a specific figure: "There is no fixed, absolute lower limit for mortgage rates."

The level of loan interest rates is based on the banks' refinancing costs. "However, interest rates for bank deposits and capital market returns, and therefore also mortgage rates, cannot fall indefinitely," says Bargel. "There are economic and, in some cases, legal limits, but these cannot be precisely defined."

FMH expert Herbst, on the other hand, knows the banks' absolute pain threshold: "I see a lower limit at 0.6 percent. This amount must be charged to cover margin, default risk, and administrative costs." Considering current interest rates for five-year loans, German banks are not far from this level.

Equity ratios increase

With financing costs so low, the thought of a dangerous real estate bubble, constantly inflated by policies of cheap money, regularly arises. Indeed, prices, especially for condominiums in major cities and for new builds in general, continue to rise. Yet Germans remain cautious when it comes to financing.

The Association of German Pfandbrief Banks (vdp) observed two things last year: While the proportion of borrowed capital used for traditional single-family homes rose from 74 to 77 percent, buyers of condominiums became even more cautious and contributed more equity than before: The proportion of borrowed capital fell from 80 to 76 percent – ​​even though apartment prices rose more sharply than house prices.

“We have not observed an increased appetite for risk in the purchase of residential property in Germany in recent months,” said vdp spokesperson Helga Bender. “Banks and consumers continue to finance real estate very conservatively. On average, residential property buyers contribute 24 percent equity and choose an initial repayment rate of three percent.” Four years ago, this figure was still at 2.3 percent.

Source: Die Welt