Interest rate commentary: trend reversal in construction loan interest rates

The first months of 2022 point to a sustained turnaround in construction financing interest rates. While last year saw interest rate hikes followed mostly by setbacks, since the beginning of the year it has become apparent that interest rates for construction financing are now moving upwards on a sustained basis. While last year's zinsvergleich zins-kommentar forecast still assumed stagnating construction financing interest rates at a very low level, there are now clear signs of a turnaround in interest rates on the construction financing market. As a result, many builders are trying to lock in current interest rates while they still can. The u.S. Central bank has already completed the interest rate turnaround in mid-march, raising the u.S. Lending rate for the first time since 2018. The european central bank is already hinting that a rise in lending rates is also imminent in europe.

Interest rate commentary 2. Quarter 2022: inflation and lending rates

According to the federal statistical office, the inflation rate in germany was already 5.1 percent in february – due to further increases in energy prices. In the euro area, it was 5.9 percent. ECB chief christine lagarde has already spoken of the possibility of inflation in the euro zone of up to 10 percent. Interest rates on construction loans have risen significantly this year – they are currently at the same level as in 2018. On average, a 10-year fixed rate is currently being charged at just under 2 percent. For a 20-year term, the 3 percent mark is within reach. Two years ago, borrowers were still receiving historically low interest rates of 0.62 and 0.89 percent respectively. The jump in interest rates in the past few weeks is therefore remarkable.

Nevertheless: the level is currently still low. Thus, in 2011, an average of 4.2o had to be paid for a 10-year fixed-rate loan and 4.70 percent for a 15-year fixed-rate loan. But: since then, real estate prices have risen sharply in some cases. At the same time, an increase in household income was also recorded. In short: for well-off households, buying a property is still feasible without having to take too much risk. With the current events in ukraine, the still present pandemic and the rising inflation rate, further forecasting is extremely difficult.

However, interest rates will not become more favorable for the time being. Therefore, now is the time for all first-time lenders whose fixed-rate contracts expire in the next 2-3 years to look for follow-on financing. In addition, debt restructuring is generally possible ten years after a loan has been disbursed, with a notice period of six months. Many home loan borrowers who do not yet have a special right of termination can also secure interest rates for up to five years in advance with a forward loan. Forward loans, which played almost no role in recent years, now already account for almost 12 percent of all follow-up financing. With a further upward trend.

What is the ECB planning??

The european central bank (ECB) has announced a cautious normalization of monetary policy in march 2022. However, it does not intend to move as quickly as the federal reserve (fed). The intention is to end the bond purchases in the summer – with the addition of the words "when the situation is right". And "some time after" the interest rates are supposed to be raised.

The ECB's announcement is based on forecasts which, however, have uncertain foundations: the ECB will stop its bond purchases in around six months, as the economy would then resume in the summer at the latest following a major setback caused by the war in ukraine and the russian embargo the ECB assumes that inflationary pressure will remain high until the summer of 2022, but will then stabilize at this higher level. Ten-year federal bond yields are then expected to rise from 0.38 to at least 0.7 percent by year-end.

Interest rate commentary: what bonds have to do with the interest rate on construction loans

The interest rate trend for 10-year federal bonds is linked to the mortgage interest rate. When yields rise, the interest rate for mortgage financing also rises – and vice versa.
The upward trend in bond yields has begun this year and appears sustainable. The turnaround in interest rates actually began in the last quarter of the previous year. First, inflation expectations in the bond market have risen steadily. They form the basis for the ECB to adjust its monetary policy accordingly. As a further consequence, real interest rates are now expected to rise. These generally increased with higher expectations for monetary policy. A 25 basis point rate hike is expected by 100 percent of money market experts, and another by as many as 80 percent.
In addition, higher inflation expectations and the likelihood of a rise in interest rates have already caused yields on ten-year federal bonds to rise from minus 0.4 percent in december 2021 to almost plus 0.4 percent at present.

Construction interest rates have already responded to the rise in bond yields: since the beginning of the year, interest rates for loans with ten-year fixed interest rates have risen by approx. 1 percent increase on average. An increase that no expert had expected in this short two-year period last year. The basis of this increase is the then unanticipated inflation rate increase and the quickly followed announcement of a possible change in the policy of the central banks. In plain language, this means that for real estate buyers with an average financing requirement (300.000 euros at a 70 percent loan-to-value ratio), the monthly rate for interest and repayments on an annuity loan now rises by approx. 250 euro per month.

What first-time financiers should do

If you follow this interest rate commentary, the following scenarios are realistic: interest rates for construction financing loans will continue to rise. Whether or not there will be a rapid increase cannot be seriously predicted. The development at a level that is still moderate in a decade comparison nevertheless gives prospective real estate buyers room to plan their purchase and financing carefully. However, special attention must be paid to the equity portion of the financing. Particularly favorable interest rates and thus favorable financing can only be obtained if you can contribute at least 20 or better 30 percent of your own funds. Under this condition, loan financing remains favorable in a historical comparison. Of course, in times of rising interest rates, it is advisable to aim for the longest possible interest rate lock-in on the contract. This way, you can secure favorable financing for the long term and don't have to worry about very expensive follow-up financing later on. Although banks charge higher interest rates for particularly long-term contracts. But it still pays.

Interest rate commentary recommended action for follow-up financing

Those who are currently already servicing a construction financing loan should not wait. In a first step, analyze the current contract and examine the possibilities of a special right of termination, a debt rescheduling and early follow-up financing. Because who can conclude now a long-term follow-up financing at the currently still very favorable interest rates, should also do that. Bank-independent construction financing brokers such as accedo AG can help you with this. Take advantage of the free consultation offer and together find the best solution for a long-term, low-interest and therefore secure refinancing of your current construction loan.

Reschedule a current construction loan? Difficult, but doable if you know the conditions and find intelligent solutions.

Like this post? Please share to your friends:
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: