Rising interest rates: when the dream of owning a home crashes

Status: 06/13/2022 11:59

Rapidly rising construction costs and interest in construction have ruined the dream of most average earners to own real estate. If you still want to shop, there are a few things you should pay attention to – and act quickly.

The young teacher Stefan P. wanted to fulfill his dream of owning a house. Virtually everything was already in dry cloths. At the beginning of 2021, he planned to build a house and obtained offers. The property has already been acquired on equity and the new turnkey building should cost € 525,000. With the annual interest rate of 0.6 percent at that time. for a 15-year security, the monthly loan installment including 2% of the initial payment was EUR 1,138.

After a year abroad, the project should be implemented. A few months ago, the teacher asked again about construction costs and interest. The result is bitter: the same house should now cost € 590,000, the interest rate on the loan is 2.9 percent per annum. This means a credit rate of € 2,409. Too much for Stefan P. – the dream of owning a house broke.

Many home builders face great problems

The current situation causes serious problems for many potential homeowners. Mortgage rates have skyrocketed since Christmas. Even most of the experts did not expect it. At the end of May, the interest rate for ten-year fixed interest rates was around 2.7 percent, according to the NRW consumer advisory center. Compared to the 2000s, this is still little – but much compared to historically low interest rates. “Due to high inflation, among other things, there is some evidence that interest rates will continue to rise,” says Thomas Hentschel, Chief Financial Officer at NRW’s Consumer Advisory Center.

Experts initially predict moderate growth in mid-July. Further steps may take place in the course of the year. Azemos Vermögensverwaltung Managing Director in Offenburg, Rainer Laborenz, also expects a further increase in interest rates. Faced with the uncontrolled rise in inflation, investors are less and less willing to invest their money with interest rates close to zero. And central banks would also have to tighten the interest rate screw significantly to regain control of monetary stability.

Longer fixed interest rates make sense

“Problems will arise if the fixed 0.6% interest rate on real estate financing expires in a few years, and borrowers can no longer afford the loan interest rate, which can be up to three times higher,” says the manager of azemos. director.

Due to rising interest rates, it recommends to its clients a period of at least 15 years in order to obtain a certain hedging of interest rates. “The interest premium for collateral with a longer interest rate is relatively low. There is only 0.6 percentage points between the 10-year and 20-year fixed interest rate, ”says Laborenz.

Warning about allegedly favorable conditions

Mortgage rates are rising while property prices are also rising rapidly. A consumer advice center recently published information that consumers should take into account. “Anyone who is currently planning to finance a property should calculate carefully,” says Hentschel. “Monthly interest and repayments should not exceed 30 to 35 percent of your net income available. Because there are at least ten to 15 percent of the cost of maintaining a property, such as electricity, heating, water, taxes or fees. ” It is also known that these prices are rising.

The consumer advisory center warns that the credit terms in advertisements are often set too low. Likewise, you should not be blinded by interest rates offered by your home bank or on internet portals. In most cases, these offers only cover part of the loan amount. With more capital borrowed, the bank’s risk increases, and thus the interest on financing.

Extend an existing loan now?

Rainer Laborenz recommends early loan extension for homeowners who need to extend their loan for the foreseeable future. As one has to take into account a further increase in mortgage rates, the so-called “Forward loan”. This works like normal top-up financing – with the special feature that the customer comes to an agreement with the bank well before the end of the old interest period. This means that the customer can already secure the interest on the merger for financing today.

Ideally it may be cheaper. First of all, it gives clients greater predictability and certainty of loan service in the long term.

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