Higher interest rates: The dream of owning a home is becoming more expensive

Status: 01/19/2022 2:44 p.m

Building money is still cheap. But mortgage rates are likely to rise sharply in 2022. This is also shown by a look at the yield on the ten-year federal bond, which is positive again for the first time in three years.

By Angela Göpfert, tagesschau.de

No more negative interest rates – this has recently been the case, at least in part, on the German bond market. There, the yield on the ten-year federal bond rose to over zero percent in the middle of the week. It is therefore positive again for the first time since April 2019. Background is a sell-off in US bonds. In its wake, investors are throwing government bonds out of their portfolios, and that is causing prices to fall. In return, returns increase.

Oliver Eichmann, interest rate expert for the European region at Deutsche Bank subsidiary DWS, sees the rise in German yields as being due to the persistently high inflation rates, the market expectation of imminent and strong interest rate increases by the Federal Reserve and a less expansive monetary policy by the European Central Bank. “We are assuming that the yield on ten-year Bunds will continue to rise this year, up to around 0.2 percent.”

How does a federal bond work?

A federal bond is used for state financing. Institutional investors lend their capital to the federal government for a certain period of time. In return, they receive fixed interest (coupon). Private investors also have the opportunity to buy or sell shares in federal bonds via the stock exchange.

Borrowing becomes more expensive

The heavily indebted German state should not be happy about this development, as the positive yield on ten-year government bonds means that it will soon have to pay interest again on loans taken out over this term. Most recently, the Federal Republic had even made money from borrowing thanks to the negative interest rates on the bond market.

But life on credit is likely to become more expensive in the future, not only for the German state, but also for consumers. The positive return on the ten-year federal bond does not mean anything good for construction interest rates either, emphasizes Max Herbst from the Frankfurt financial consultancy (FMH) of the same name in an interview tagesschau.de.

Higher Pfandbrief interest rates equal higher building interest rates

In fact, the ten-year government bonds set the direction for Pfandbrief interest rates and thus indirectly for building interest rates. The banks deny their mortgage lending business primarily through trading in Pfandbriefe.

When setting the Pfandbrief interest rates, the banks follow the specifications of DekaBank Deutsche Girozentrale in Frankfurt. This determines the yield for Pfandbriefe with a term of ten years and is based on the interest rates on ten-year federal bonds. The banks then add a risk premium of 0.5 to 0.7 percent on top of the Pfandbrief interest rate – and the building interest rate is complete.

Stricter BaFin rules drive building interest

“Usually, construction interest rates drop at the beginning of the year, the banks want to make more volume than margin. But that won’t be the case this year,” financial expert Herbst is convinced. This is not only due to the rising yields on federal bonds, but also to the German financial supervisory authority BaFin.

This recently pushed the banks to stricter risk provisions. In the future, banks should protect themselves against defaulting real estate loans with higher reserves. “That has a negative effect on the interest situation of the banks – but in the end it’s not the bank that pays, but the bank customer,” explains FMH expert Herbst.

Building interest of up to 1.75 percent in 2022

The trend towards rising interest rates is not a completely new phenomenon. Interest rates had already reached their low point of 0.62 percent in 2020. In the new year, they climbed above the 1.0 percent mark for the first time in over two years. Financial expert Herbst expects construction interest rates to rise further over the course of the year, not least in view of the rising inflation rates: “I do think that we will see 1.5 to 1.75 percent here over the course of the year.”

However, the industry expert warns against dramatizing the situation on the market for real estate loans and illustrates this with a calculation example: “An increase of 0.1 percentage points means 33 euros more per month for a loan of 400,000 euros and a term of ten years. Even an increase in building interest by 0.5 percentage points would cost real estate buyers just 166 euros more per month.”

Max Herbst from FMH Finanzberatung expects construction interest rates to continue to rise.

Expert warns against hasty decisions

In the opinion of the mortgage lending expert, such amounts should never be the deciding factor as to whether someone can afford a property or not. If necessary, you can also set the repayment rate lower instead of the usual two or three percent repayment.

“People don’t have to sign anything in a panic,” warns Herbst. Being put under pressure when buying for fear of rising interest rates would be the worst thing you could do now.”


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