Fixing the right mortgage interest rate in times of high interest rates

Rising interest rates are putting would-be home purchasers in a tight position. But with the market stabilising somewhat, and rental prices still sky-high, it might now be a case of simply biting the bullet and securing a mortgage. Peter Kleinwӓchter from Your German Mortgage explains what’s behind the recent hike in mortgage interest rates, and explores what options are open to buyers. 

Interest rates for mortgages on real estate have risen significantly compared to January 2022 - in fact, they have quadrupled. 

What does this mean for real estate buyers in Germany?

Many first-time buyers are therefore no longer in a position to take out financing, as the liquidity calculation made by the banks means their income is no longer considered sufficient to cover the much higher monthly loan instalments. Due to this, a large number of potential buyers have had to leave the market. 

Nevertheless, interestingly enough, house prices in Germany have not yet come under significant pressure. 

Those who can still obtain financing have meanwhile recovered from the initial shock of rising prices and are increasingly ending the buyers' strike. Mortgages are being taken out and properties are changing hands.

After all, what is left for those who need a new or larger home due to professional, spatial or family changes? The rental market is tight precisely because of the prevailing situation and if one finds an acceptable rental solution at all, it has also become very expensive.

Buyers who can afford property are in a stronger position

Therefore, it is now a case of biting the bullet and making the best of the situation.

Many developers and sellers are now prepared to make concessions. The negotiating position of buyers has improved noticeably. 

That's why it's worth taking a look at financing again, because it currently looks as if the peak in mortgage interest rates has been reached and there are also signs that the rates might begin to fall once again. 

What caused the spike in interest rates?

According to general opinion, the reason for the current high interest rates is the rapid rate of inflation. According to the experts, this has been caused to a large extent by high energy prices and the high demand for consumer goods in the wake of the coronavirus pandemic, which previously massively restrained consumer demand. 

In January 2023, inflation in Germany dropped to 8 percent, down from highs of around 10 percent seen during the final months of 2022. 

As a result, interest rates have also eased somewhat.

The impact of the base effect

People often lose sight of the fact that there is a so-called base effect when calculating the inflation rate. What is this? Simply put, the base effect describes how monthly inflation figures can be distorted by how high or low inflation was in the previous year (the comparison month). For example, if prices were low in 2022, and we report an 8 percent price increase in 2023, this is clearly much less significant than if prices were already high in 2022. 

The current inflation rate of 8 percent reflects the price of goods and services compared to January 2022. Back then, the price increases were still moderate and in particular natural gas prices were still at the level of 2021, meaning that January 2023 looks particularly “bad” in comparison. 

As we know, this changed significantly after Russia's war of aggression began in February 2022, and prices - particularly for natural gas - began to skyrocket. Comparing these higher prices with the ones we are now facing will presumably result in a smaller year-on-year inflation rate. 

In March 2023, we will be able to compare current prices with the prices of March 2022. Will inflation still be at 8 percent then? Probably not. Can we therefore forecast drastically lower interest rates already this year? It’s likely, but we still need to proceed with an appropriate amount of caution. 

What financing rates are currently available for mortgages?

So how can we put what we know into some thoughts on taking out a mortgage in 2023 when the rates are higher than they were 12 months ago, but not necessarily going down anytime soon? 

The interest rates for 15, 10 and five-year fixed-rate mortgages are currently almost identical. Therefore, there are two scenarios, with different risk profiles, that you could consider: 

Scenario 1

The 15-year interest rates are currently almost identical to the 10-year conditions. A fixed interest rate of 15 years can, according to the law, actually be terminated after 10 years with a notice period of six months, free of charge, and the borrower can refinance again at more favourable conditions. 

So, if you choose a 15-year fixed interest rate now, you can benefit from a long period of security, combined with the chance of a possibly lower interest rate in 10 years. Even a 20-year fixed interest rate is not significantly more expensive.

Scenario 2

If you choose a fixed interest rate for five years, your rate will be almost the same, but you will have the opportunity to refinance again in five years, at a different rate. This is great news if rates go down in the future, but it is a more risky option if they do not. 

This is not everyone's cup of tea, because of course no one knows now what the world will look like in five years. But with an understanding of the conditions described above, it should be possible to make a rational decision.

Get some advice

As always, we can only present you with the pros and cons and hope that this gives you the confidence to make a reasoned decision on your own. 

Considering a real estate purchase but concerned about interest rates? Your German Mortgage is happy to advise you on not only this topic, but all other questions concerning real estate purchase. Get in touch today!