Buying a house when interest rates are rising – here’s how it works

Cover story: Buy when interest rates rise – how to do it

The time of cheap money is over for now. So if you finance your property with a loan, you have to calculate carefully. And: costs can still be reduced.

Jessica Ullrich and Henning Sievert are the real estate lucky guys of the zero-interest phase: The two Hamburg fugitives not only found a real house bargain in the countryside in Nortorf, halfway to Flensburg, for 260,000 euros (almost 1300 square meters of land, 6 rooms, 140 sqm of living space, built in 1912 without a renovation backlog), which they were able to move into last year. They also got a zero before the decimal point for their financing: they brought 110,000 euros of equity with them, the rest they financed as a classic repayment loan over ten years with 0.67 percent effective annual interest at the ING Bank, monthly rate 1580 euros. Because they both work, they handle it well. “It’s a great prospect for life planning if you can assume that we’ll have paid off our house in full by the time we’re in our early 40s,” says Henning Sievert. Today, 2.3 to almost four percent would have to be paid for this, the monthly rates reach around 2000 euros. Such an increase could shatter many house building dreams. “Anyone financing now needs money and nerves,” says financial advisor Max Herbst, commenting on the trend.

It’s that much more expensive today

The construction interest is based on the yield development of the ten-year federal bond, with which Finance Minister Christian Lindner (FDP) borrows money. And they pick up in times of high inflation rates: “After all, no investor is willing to lend their money for less than one percent interest when the inflation rate is more than seven percent,” says Max Herbst. The state must therefore offer more. “The yields on federal bonds are rising – and with them the construction interest rates.”

The effect: Since Christmas, the cost of a loan with a ten-year fixed interest rate has more than doubled. The median interest rate jumped from 0.9 to 2.35 percent. And the financial advisor does not see an end: “Interest rates of four percent are not pessimistic this year, but very realistic.”

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High inflation is only part of the reason. Banks add administrative, risk and processing costs and their margins on top of that. In addition, as required by the financial regulator Bafin, they must increase their equity ratio. In the end, the construction financing customer also pays for this. The credit also becomes more expensive. In Max Herbst’s financing comparison, six out of 46 providers already charge more than three percent. A time bomb is ticking for everyone whose financing is about to expire and who have not yet been able to fully repay their loan. You need a new round of credit. The portal Immowelt calculated for a realistically expensive 80 square meter apartment in Munich (800,000 euros; 2.5 percent repayment) with an interest rate jump to three percent already with additional costs of over 1000 euros per month. Financial advisor Herbst therefore advises securing the still cheap forward loans for follow-up loans – in case of doubt even for several years in advance.

Important again: Equity!

A few tips to keep the costs of real estate financing under control still work:

Buy the land first, then build. This initially saves ancillary construction costs (tax, broker). The land can then serve as the bank’s higher-rated security for the building, and this is often rewarded with interest discounts of a few tenths of a percentage point.

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Track all equity. These include cash, overnight and fixed-term deposits, securities, life insurance, home loan savings contracts ready for allocation, Riester pensions saved, loans from employers, valuables such as paintings and coins or personal contributions that you would like to make when building/renovating a house. The more equity you track down, the lower the risk for the bank.

Split funding. If you expect a larger sum of money in a few years (life insurance payment, inheritance), you should only take out part of the financing sum for a correspondingly shorter term. That also pushes interest rates down.

Interest up, purchase price down. This works for leasehold contracts. You save some or all of the purchase price, but you have to pay higher interest rates. Favorable offers are available from local authorities or property management companies.

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