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MORTGAGE IN GERMANY IS EXPERIENCED BY A BOOM, BUT INTEREST RATES ON LOANS ARE INCREASING.

High demand for real estate has further exacerbated the construction financing boom during the 2020 COVID crisis.

  • APRIL 12, 2021

The amount of construction loans issued by German banks rose to a record 273 billion euros after 263 billion euros in 2019. In turn, the volume of mortgage lending to individuals by banks amounted to just under 1.4 trillion euros. Last year, the loan portfolio amounted to 1.3 trillion euros. However, recently the conditions for issuing construction loans have deteriorated. This means higher costs for property buyers.

The construction loan business, which has been doing well for many years, received additional momentum last year due to the pandemic. The growth of the loan portfolio accelerated to 6.6 percent per year in 2020. In 2019, low interest rates on construction and higher real estate prices led to an increase in the portfolio of construction loans by 5.7 percent.

In a pandemic, the demand for apartments and houses has increased even more. In times of quarantine and remote work, as well as the lack of alternative investments, many people dream of their big house at low interest rates. This leads to higher prices: according to the Federal Statistical Office, buyers of real estate had to pay in 2020 an average of 7.4 percent more than in the previous year.

According to a PwC study, many homeowners receive low interest rates due to long-term contracts: for the first time, the average term of loans for new construction has exceeded eleven years. As real estate prices rise in many places and not everyone can raise more capital, the volume of loans also often increases.

According to Hüttig & Rompf, a housing finance company, the down payment last year was 20%. This is four points less than in 2016. However, since the beginning of the year, loans for real estate buyers have become more expensive. The interest rate on ten-year loans has risen by almost 0.2 percentage points over the past two months and now averages about 0.9 percent. Interest rates rose along with the overall level of profitability of stock exchanges. Investors expect significantly higher inflation rates as they bet on a crown pandemic and economic recovery. Huge government aid, for example in the United States, should also boost inflation.

According to Miriam Moore, Interhyp's board member for private clients, property buyers will continue to have access to cheap mortgages. Take a look at previous years, when interest rates of four percent or more were not uncommon, and evaluate the increase. "Construction money is still very cheap and will remain so given the effects of the pandemic and monetary policy."

Indeed, the European Central Bank and the US Federal Reserve are pursuing soft monetary policies, despite higher inflation prospects. This reduces bond yields, says FMH real estate expert Max Herbst. However, as inflation rises, he expects the interest rate on ten-year construction loans to exceed one percent during the year.

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