Will the real estate loan become a time bomb?
Those who build or buy a house these days benefit from one thing in particular: from historically low interest rates. The low key interest rate and the situation on the financial market ensure that loan interest rates remain at the lowest level. In the meantime, real estate loans are only half as expensive as the offers around ten years ago. Anyone looking for a ten-year loan had to pay an average of 2 percent interest in mid-January. In addition to the low interest rates, the borrowers have a ten-year term. But the appearance of cheap real estate loans is at least to some extent deceptive. According to experts, it cannot be assumed that interest rates will be as low as ten years from now. But what happens when lending rates rise? Will there be a dreaded debt crisis in Germany?
Low interest rates increase equipment requirements
The currently low interest rates ensure that many builders and property buyers are ready to take up a higher loan amount. Thanks to the lower additional financial expenses caused by the loan, you can quickly have a nicer bathroom, a nicer plot of land or simply a better location in your own budget.
This attitude, however, could develop into a ticking time bomb. With high loan amounts, rising interest rates are much more noticeable. Much of the real estate loan that is now being concluded will expire in ten years. Then the borrowers have to renegotiate with the banks. According to the Bundesbank, residential construction loans in Germany totaling three trillion euros were granted to households in November last year. About three quarters of these contracts have fixed interest rates that go beyond five years. Most of the banks rely on a fixed rate of ten years.
Follow-up financing involves risks
The basic principle is that every follow-up financing comes with certain risks, because the terms offered by the bank are basically in the stars. Such market conditions are not uncommon. In other European countries, however, such developments have repeatedly led to consumer indebtedness crises. So far, this has largely been ruled out in Germany. The reason given is the conservative mentality of German citizens. The majority of Germans raise a considerable amount of equity for construction financing. Borrowers borrowed an average of 75 percent of the required amount last year. The rest was raised as equity. In the Netherlands, for example, the picture was very different. Dutch borrowers mostly borrowed more than 120 percent from real estate loans. The now quite high repayment shares offer further security. According to real estate economist Michael Voigtländer, Institute of the German Economy, the days when borrowers only paid out about 1 percent monthly were long gone. In the meantime, 2.5 percent are considered the standard rate.
Up to 3 percent repayment
In some cases, the repayment rate is even higher. The number of contracts with a repayment rate of 3 percent has increased significantly. According to Christian Walburg, Association of German Pfandbrief Banks, the burden on borrowers remains quite high, especially in the first few years. Consumers consciously accept this. Here, too, the picture is different in other European countries. In the UK, for example, despite low interest rates, borrowers haven’t paid a cent off their loans for a long time. As a result, households were falling further and further into the dangerous interest rate trap.
In this country, there is a certain level of security from the banks, because loans without repayment are not granted. Most banks even require a repayment of 2 to 3 percent for the loan. If the customer does not want to accept this, he will not receive a loan. The banks are currently recommending paying the home savings contract instead of repayment. At first glance, this may be tempting, but consumers have to pay a lot of money to fix the interest rate.