The dream of owning your own home is a long way off

The turnaround in interest rates has long been here: building interest rates are rising noticeably and making house purchases significantly more expensive. t-online explains what builders need to be prepared for now and how houses can best be financed.

Lack of building materials, few craftsmen and expensive building land: Anyone who wants to build a house now has it much more difficult than in the past. In addition, there has recently been a significant jump in building interest rates, which makes financing your own home significantly more expensive.

“For the coming weeks and possibly months, real estate buyers must therefore reckon with the possibility that mortgage interest rates will tend to continue to rise,” says Michael Neumann, CEO of the credit broker Dr. Small, t-online.

The expert therefore advises that the construction financing should be “designed to be solid and not to be pushed into the hasty purchase of a property that, on closer inspection, turns out to be of no value”. A bank comparison can help. But what else should homeowners pay attention to – and why are interest rates rising so sharply in the first place? t-online answers the most important questions about the building interest boom.

How high are the interest rates currently?

Currently, the average interest rate for ten-year standard loans is 2.12 percent, which represents a doubling since December, according to the Frankfurt-based FMH Finanzberatung. It’s the biggest jump since 1999. But to get the full picture, interest rates were between 5 and 6 percent at the time. Despite the significant increase, the conditions are still more favorable today than they were a few years ago.

The real estate financier Interhyp has also determined the same upward movement. For ten-year loans, Interhyp expects a further increase in building interest to 2.5 to 3 percent by the end of the year. According to a recent report, in March such financing rose by around 0.5 percentage points compared to the previous month. Although experts had expected an increase in construction interest rates this year, the current values ​​exceed these estimates.

A sample calculation shows the effect that even a small change in the interest rate can have on the financing: With a loan of EUR 400,000, an interest rate increase of 0.25 percentage points per year results in higher costs of EUR 1,000, calculated over ten years there are additional costs of EUR 10,000 .

What does the ECB have to do with the increase?

The European Central Bank (ECB) under its President Christine Lagarde specifies the so-called interest rate environment via the key interest rate. If it raises the key interest rate, the commercial banks have to pay more for a loan. They pass these costs on to their credit customers in the form of interest.

Although the ECB has not yet heralded the turnaround in interest rates, there are signs that the zero-interest phase will end in the foreseeable future. Nevertheless, Michael Neumann says of Dr. Klein with regard to building interest rates: “We are currently in a very dynamic environment: interest rates have risen unusually sharply in a very short time this year and are subject to large fluctuations.”

The construction interest is based on the yields on federal bonds. Last week, they hit their highest level since mid-2015, climbing to 0.84 percent. This development, in turn, is related to the general rise in interest rates in Germany and the entire euro zone, which is largely influenced by the ECB.

ECB President Christine Lagarde: Despite the high inflation rate, the European Central Bank is sticking to its zero interest rate policy. (Source: Political Moments/imago images)

It has a mandate to get rising inflation under control again by tightening its ultra-loose monetary policy of zero interest rates. In March, prices in Germany rose by 7.3 percent compared to the same month last year. The situation is similar in the USA, but while the US Federal Reserve initiated the interest rate turnaround in March with a first rate hike, the European Central Bank has so far held back. After setting interest rates on Thursday, ECB President Christine Lagarde announced that she would continue to adhere to the zero interest rate policy.

For experts Neumann, the “current interest rate level cannot only be justified with rational arguments”. Rather, there is a whole range of uncertainty factors due to the unforeseeable economic consequences of the Ukraine war, further corona lockdowns in China and the resulting supply chain failures. The financial markets are “extremely nervous and interest rates are volatile”.

“The current ECB decision will not change anything about that: As long as the ECB keeps all options open and does not clearly state when the first rate hike will take place and what the future prospects are, the markets will lack orientation and predictability,” said Neumann zur Decision to stick to the zero interest rate policy.

For savers, the situation is currently doubly bitter: Loans are becoming more expensive, but their bank deposits continue to yield no interest or are even charged negative interest.

What can home builders do now?

“Anyone who needs a loan should prepare early, compare conditions now and calculate the effects of a further rise in interest rates for themselves,” advises Mirjam Mohr, director of private customer business at Interhyp. She recommends a rather higher initial repayment and longer fixed interest rates.

With intermediary Dr. Small is already noticeable. Real estate buyers are increasingly choosing longer fixed interest rates of 13 years and ten months, it said. “Now is a good time for property owners to take care of follow-up financing – even if this is only due in a year, two or three years,” advises Michael Neumann, an expert at Dr. Small.

The credit broker Baufi24 also refers to forward loans, with which property owners can secure the interest for follow-up financing up to five years in advance for a surcharge. Read here for whom such a form of financing can be worthwhile.

For some, the higher costs could put an end to the dream of owning a home for the time being. Real estate and construction prices have risen significantly in recent years, partly because real estate is considered a good investment. Favorable interest rates made financing possible for many buyers and builders. While interest rates are now rising again, residential property prices have also continued to rise – by around eleven percent in 2021 alone.

The times when many people could still afford property through cheap financing could now be over, according to Ditmar Rompf, CEO of the construction financier Hüttig & Rompf. Even a small increase in interest rates can significantly increase the monthly burden. “That can be too much for some households if the construction financing was too tight.”