Rising interest rates: When the dream of buying a house breaks

Rapidly rising construction costs and building interest have ruined the dream of owning a property for most of the average earner. If you’re still looking to buy, there are a few things you should keep in mind – and act quickly.

Young teacher Stephen P. wanted to make his dream come true. Actually everything was already in dry clothes. In early 2021 he planned the construction of the house and received proposals. The property was already acquired from equity and the turnkey new building should have cost 525,000 euros. The then annual interest rate for the 15-year interest rate security, at 0.6 percent, the monthly loan installment was 1138 euros with two percent initial repayment.

After a year abroad, this project should now be realized. A few months ago, the teacher again asked about the construction cost and interest. The result is bitter: the same house should now cost 590,000 euros, with loan interest at 2.9 percent per annum. This means a credit rate of 2409 euros. The dream of owning a home was shattered – too much for Stephen P.

Many home builders face big problems

The current situation is creating major problems for many potential homeowners. Mortgage interest rates have skyrocketed since Christmas. Even most experts didn’t expect it. At the end of May, the lending rate for ten-year fixed interest rates was around 2.7 percent, according to the NRW Consumer Advice Center. Compared to the 2000s, this is still very low – but much higher than historically low interest rates. “There is some evidence, among other things, that interest rates will continue to rise because of higher inflation,” says Thomas Hentschel, finance officer at the NRW Consumer Advice Center.

Experts predict moderate growth initially in mid-July. More steps may be taken during the year. Rainer Lebrenz, managing director of the Azemos Vermogensverwaltung in Offenburg, also expects interest rates to continue to rise. Given the uncontrolled rise in inflation, investors are least inclined to invest their money at interest rates close to zero percent. And to bring monetary stability back under control, central banks will also have to tighten the interest rate screw significantly.

Long fixed interest rates make sense

“Problems will arise if, in a few years, the fixed interest rate for real estate financing ends at 0.6 percent interest and borrowers can no longer afford the loan rate, which could be as high as three times,” said Azmos Management. Says the director.

Considering the rising interest rates, he recommends his clients for a period of at least 15 years to get some interest rate protection. “The interest premium for a long interest rate security is comparatively low. There is a premium of only 0.6 percentage points between a 10-year and a 20-year fixed interest rate,” says Lebrenz.

supposedly warning of favorable conditions

Mortgage interest rates are rising at a time when real estate prices are also rising rapidly. The Consumer Advice Center recently published information that consumers should pay attention to. “Anyone who is currently planning to finance an asset should do careful calculations,” Hentschel says. “Monthly payments for interest and repayment should not exceed 30 to 35 percent of disposable net income. Because there are at least 10 to 15 percent additional costs for the maintenance of the asset, such as electricity, heating, water, taxes or fees. ” And these prices have been known to rise as well.

The Consumer Advice Center warns that credit terms are often set too low in advertising. Similarly, one should not turn a blind eye to the interest rates offered on house banks or internet portals. In most cases, these offers are applicable only on part of the loan amount. With more borrowed capital, the risk of the bank increases and thus the interest for financing.

Extend an existing loan now?

Rainer Lebrenz recommends an early extension for homeowners who need to extend their loan in the near future. As one has to contend with further rising mortgage interest rates, he recommends a so-called “forward loan”. It works like normal follow-up financing – with the special feature that the customer enters into an agreement with the bank long before the end of the old fixed-interest period. This means that the customer can already secure connection interest for financing today.

Ideally, it could be cheaper. Above all, it offers customers greater predictability and the security of being able to service the loan over a longer period.