What does inflation mean for home loans?

Inflation has risen sharply in recent months, and the European Central Bank (ECB) has been reluctant to raise interest rates for a long time. Now the key interest rate and higher interest rates on financing are imminent. But what does this situation on the financial market mean for those who are just realizing their dream of a house in the countryside? What interest rate developments can be expected for real estate loans? This article explains what developments can be expected and what should be considered when lending.

ECB raises key interest rate

Inflation has almost reached an all-time high. Germany’s leading economic research institutes agree that inflation will remain high in the near future. There are several reasons for this. On the one hand, there are rising energy costs. On the other hand, there are supply bottlenecks that restrict supply while demand remains. Current forecasts anticipate inflation of between 6.5 and 7.5 percent. This not only leads to price increases for consumers. This also creates fluctuations in the financial sector. After a long back and forth, the ECB recently changed its previous path and decided to raise the key interest rate from July 2022. The key interest rate will thus rise from zero to 0.25 points. This reaction from ECB boss Christine Lagarde came much later than expected. Further general information on inflation and interest rates can be found at, for example.

Higher interest rates on home loans

While the central banks have not yet agreed in 2021 whether interest rates will rise, fall or remain the same, a rate hike is now certain. But what are the consequences of the current interest rate policy on interest rates on loans? Borrowers will feel the rate change. Interest rates on current mortgages do not change. But for all loans that are now taken out, the interest rates increase significantly. Follow-up financing is also a new loan and is therefore subject to the increased interest rates. This primarily affects builders who have already taken out a home loan and need follow-up financing to complete the building. This will reduce the demand for credit. But inflation and housing loans are also related in another way. Because even if the interest rate on an existing loan remains the same, the cost of living has increased significantly. It is now becoming increasingly difficult for house builders with an affordable housing loan to pay the installments.

Alternative to existing credit

However, the banks are currently expecting interest rates to rise not only for real estate financing, but also for consumer loans. Because of the higher prices, house builders with an existing home loan may not be able to get by with the guaranteed amount. But what to do if the current loan is not enough for the construction project or renovation? A possible solution would be an increased credit limit. But some bank advisors advise against modifying existing loans. After all, the low interest rates will not return any time soon. Instead, borrowers are advised to take out an additional loan. But you have to be able to afford it.

Think carefully and compare

It follows that if you want to take out a new loan or an extra loan, you should be able to assess your own financial situation well. It’s not just about being able to pay the monthly loan installment in addition to the fixed costs and grocery shopping. In addition, you need some financial leeway for unforeseen costs. Because anyone who has already financed a property knows that what you forgot during the planning only becomes apparent during construction. In addition, the loan rates should be compared thoroughly. For this purpose, builders ideally obtain information from several providers.

Stricter criteria for lending

For future home builders, not only the price and interest rate increases can be a hurdle. The banks in Germany also want to make the granting of real estate loans stricter. This requirement comes from Bafin, which advises banks and other lending institutions to be more cautious when granting new mortgages. A prudent measure given the potential risk that consumers will be burdened or could be overburdened by the repayment installments. The banks themselves must also take precautionary measures and build up a larger financial buffer than before by early 2023. This is intended to protect the banks themselves from loan defaults.


Not everything will be more expensive, because the good interest rates for current loans remain. Overall, however, the financial situation is deteriorating from a consumer perspective. With the increase in the key interest rate, the ECB has taken an important regulatory step. Nevertheless, all costs for home builders are increasing: higher living costs, construction costs, energy costs and rising interest rates for taking out a new loan.