Anyone who currently wants to buy a house or finance a property can currently enjoy the favorable mortgage interest rates for real estate financing. Construction interest rates have already been at an extremely low level for several years – this is naturally a great advantage for borrowers in particular.
But even if low interest rates for a mortgage mean that the monthly burden is relatively low in comparison and that you have more money to live on, there are still some risks and dangers that can go hand in hand with the construction interest rates.
As a borrower, you usually can't recognize these risks at first glance – you have to take a closer look at the subject in order to be able to assess and weigh up the possible risks.
The problem: mortgage rates can only be fixed for a limited period of time
If borrowers decide to take out real estate financing at the current low mortgage rates and can only just afford to pay the installments, the first danger is already looming. Because interest rates do not remain at this level for the entire term of the loan. If a rate of 600 euros is chosen when only 700 euros of free income is available, this is referred to as tight financing. If the loan has a term of more than 25 years, the interest rate can usually only be fixed for a maximum of 15 years. After the 15 years, the interest rate can then increase significantly. Although this does not have to be the case, the option exists in any case.
Given the current low interest rates, it is highly likely that interest rates will rise again in the future to a (possibly significantly) higher level. In the case of tight financing, the problem is that the rate increases sharply after the 15-year fixed interest period and may no longer be bearable.
The solution: secure low mortgage interest rates for a long period of time
The only sensible and secure solution is to lock in the low mortgage rates for as long a period as possible. There are also other options for minimizing the risk described above. It is advisable, first and foremost, not to make a hasty decision to buy real estate or start a construction project. The associated construction financing should be well considered. Even if the low interest rates are tempting at the moment.
Sufficient financial leeway should always be kept in mind so that in the future – when the fixed interest rate has expired – possible higher installments can be paid without any problems. On the other hand, borrowers can try to secure low mortgage rates for a maximum period of time. Many banks now offer fixed interest rates not only for five or ten years, but also for longer periods – sometimes even for the entire term of the loan. In the context of a fully amortized loan, for example, this may be the case. In such a loan, the entire term of the loan is identical to the duration of the fixed interest rate. For the borrower, there is no longer any risk of possible interest rate changes.
Note: calculate income and expenses as a basis
If you want to determine whether the current low interest rates on a mortgage do not pose an increased risk in a particular case, should interest rates change in the near future, you can do an income and expense calculation. This bill aims to calculate the discretionary income and thus provide an overview of the situation. The disposable income must be at least equal to the planned rate for the loan. For the income and expenditure statement, you add up all monthly income – the salary in the first place – and subtract from it all monthly expenditure. This usually includes the cost of insurance, electricity, gas, water and living expenses. Expert advice says that the rate for the real estate loan should end up being no more than 70 percent of discretionary income. In this way, there is a margin for later interest rate increases.