Why It’s Still a Good Idea to Invest in Real Estate Despite Rising Interest Rates

Since the beginning of the year, interest rates have skyrocketed. In just six months, these rates have increased by more than one point! Potential buyers wonder if it is still a good idea to invest in real estate. Indeed, the bank scales now show rates at 4% over 25 years. Faced with this development, does the purchase of real estate still retain its appeal? This is what brings to light finance youpresenting five major reasons why it is still worth buying.

Summary :

Buying real estate at a time of rising interest rates: an opportunity despite the challenges

Since the start of the year, interest rates on home loans have skyrocketed, rising by more than one point in just six months. The figures are eloquent: the wear rate now reaches 4.68% for loans over 20 years and more. While many banks show rates of around 4% over periods of up to 25 years, or even 20 years for certain borrower profiles.

> Consult our article on: “Usar rate over 4%: how will this impact your loans?”

After years of historically low rates, a question naturally arises. Is it still relevant to invest in the purchase of real estate when rates are returning to their level of ten years ago?

Reasons to maintain interest in buying real estate

However, even with rates around 4%, the purchase of real estate retains an undeniable attraction. At least that’s what Vousfinancer, a network of 185 credit brokerage agencies, supports. Indeed, the broker highlights five essential reasons why it is still interesting to embark on such an investment.

Julie Bachet, managing director of Vousfinancer, underlines that the acquisition of a principal residence remains a financially advantageous operation even in the current context.

“We must now try to forget that just two years ago credit cost nothing… Borrowing money at a cost, for the banks, and of course for the borrowers, but it is still financially interesting . -Julie Bachet.

With inflation struggling to ebb, it is very likely that these rate levels will settle down for a long time. The acquisition of a principal residence remains financially advantageous, despite a reduced borrowing capacity. Potential buyers must therefore adapt to this new reality, seeing borrowing money at a cost as an opportunity to be seized.

The purchase of real estate at 4%: an investment that amortizes capital

When you take out a mortgage, part of the monthly payment is allocated to interest, while the other is intended for the repayment of the capital borrowed. Remember that this sum can be recovered when the property is resold.

The breakdown between principal and interest depends on the interest rate of the loan and its term. However, this distribution has evolved in favor of interests in recent months. However, even with rates at 4%, a significant part of the monthly payment is still dedicated to capital amortization. After a few years, in the event of resale, a significant part of the loan will have been repaid.

Illustration with a concrete example of a real estate purchase

Take the example of a loan of €200,000 at a rate of 4% over a period of 20 years, excluding insurance. The monthly payment is €1,212. Thus, the first year, on average, 555 € are allocated to the repayment of the capital. While €657 is used to cover interest.

From the third year, the share of the capital becomes more important in the monthly payment than that of the interest paid. Thus, after 7 years, an amount of €52,760 will have been amortized and can be recovered in the event of resale. In comparison, over a 7-year rental period, nearly €102,000 in rent will have been paid without the possibility of recovery.

The savings aspect of the mortgage

“As soon as the loan rate is higher than 3.5% for a loan over 20 years, the interest share is higher in the 1st year than the capital share. But after only a few months, the relationship is reversed. ” – Sandrine Allonier, spokesperson for Vousfinancer.

Unlike the payment of rent, after 7 to 10 years, part of the capital will have been amortized. This thus constitutes a contribution for a future real estate purchase. Even with a rate of 4%, borrowing translates into a form of savings without even realizing it. Compared to renting, where rents paid are considered a loss, mortgages turn out to be a discreet savings strategy. A strong argument to consider in the choice to become a homeowner despite current interest rates.

Advantages of buying real estate: monthly loan payments do not increase

The monthly mortgage payments remain constant throughout the term of the loan. On the other hand, the rents can be revised each year according to the evolution of the IRL (Index of reference of the rents).

However, this revision may lead to an increase in the rent currently capped at 3.5%. For example, a rent of €1,200 can be increased to €1,241.93 in the first year. And, even more the following years if the lease provides for it.

Stability of monthly mortgage payments

Namely, 98% of mortgages are at a fixed rate. In this, their monthly payments remain constant throughout the duration of the loan. Unlike the tenant, who sees his rent increase regularly. Thus, the borrower benefits from financial stability with unchanged monthly payments. This predictability allows better management of the overall budget and debt.

Protection against inflation and rising wages

In times of inflation and salary increases in certain branches or companies, the share of monthly loan payments in the budget decreases. Unlike the rent which continues to rise.

In addition, as a tenant, even protected by legislation, we remain subject to the will of the landlord. This is why, by opting for the purchase of real estate, one benefits from greater security. Since the monthly payment of the credit will not increase and the owner will not be able to decide to recover the property or to sell it. Although there may be works to be financed, these contribute to increasing the value of the property or to preserving its value during resale.

Choosing to buy real estate therefore has a major advantage over renting. In particular by the stability of monthly credit payments. In addition, the borrower is protected against inflation and rising wages, which reduces the weight of monthly payments in the budget.

Possibilities of reducing monthly payments thanks to the renegotiation of the credit

Currently, interest rates for mortgages are back at their level of early 2013. Indeed, they are close to 4%, especially for longer terms. This rise in rates is mainly due to the actions of the European Central Bank (ECB). Since the latter has made six increases since the summer of 2022.

However, note that the rates could fall again in the years to come. To this end, note that the last increase in May was more moderate (0.25 points) than the previous ones. Moreover, once inflation reaches a level close to the set target of 2%, the ECB could lower its rates again to stimulate economic growth. This would have an impact on credit rates.

A credit renegotiation opportunity

If the rates decrease by 1 or 1.5 points in the years to come to reach 2.5%, for example, it will be interesting to renegotiate the loans. In particular those subscribed in 2023 at rates above 3.5%.

“It is from one point of difference that this operation is profitable. Even 0.70 when the credit is recent, or over a long period. This will be the case for most credits. – Sandrine Allonier.

Real estate purchase and credit

Let’s take a loan of €300,000 taken out at 4% over 25 years, with a monthly payment of €1,583.5 excluding insurance. What will happen in 5 years, if credit rates fall by 1.5 points? In this case, the loan can be renegotiated at 2.5% over 20 years, thus reducing the monthly payment to €1,434, i.e. a saving of €150 per month. In total, this represents a gain of €35,800 on the total cost of credit.

The purchase of real estate offers the possibility of benefiting from current interest rates close to 4%. However, these rates could fall again in the next few years. In the event of a decrease of at least 1 point, it will be interesting to renegotiate the loans taken out at rates higher than 3.5%. Thus, buying real estate not only offers stability in monthly payments, but also the prospect of long-term financial improvement through renegotiation.

A solid strategy to prepare for retirement

Acquiring your main residence and repaying your credit in full is one of the best ways to cope with the drop in income during retirement. According to INSEE, more than 73% of people aged over 70 in France own real estate. Against a national average of 61% for all households.

A significant gain in purchasing power

Housing represents the most important part of the French budget. In this, the monthly loan payment is often equivalent to 30% of household income. Thus, being an owner without credit to repay constitutes a real gain in purchasing power. In fact, this makes it possible to limit the impact of the drop in income at the time of retirement.

In addition, the rents collected constitute a non-negligible pension supplement. Indeed, a rental investment made before retirement, with a repaid loan, generates additional rents. These rents, although taxed, constitute an important pension supplement. Thus, in addition to ownership of their main residence, rental income can help improve the financial situation of retirees.

Buying real estate is a solid strategy for preparing for retirement. In short, it offers increased purchasing power and financial security for the retirement years to come.

Reassuring life and old-age insurance!

When you take out a home loan, the bank asks you to take out borrower insurance. In the event of temporary disability due to an accident or illness, the insurance covers all or part of the monthly payment. Unlike renting, where payment of rent remains obligatory in the event of illness, loss of employment or other accidents of life.

A guarantee for the transmission of heritage

This insurance also offers the guarantee of partial or total repayment of the loan in the event of the death of the spouse. Thus, it facilitates the transmission of heritage to children. The latter will not have to assume the payment of monthly payments to the bank or to sell the property to repay the loan in the event of the death of both parents.

A solution to prepare for its end of life

Becoming an owner also allows you to have usable capital to facilitate or improve your end of life. Indeed, being an owner offers the possibility of using products such as mortgage life loan.

> Consult our article on: “The life lease: a heritage opportunity for exceptional properties? ”

Indeed, the mortgage life loan uses the value of the heritage to obtain a sum of money. This money can be used for the arrangement of the residence in the event of dependency, the payment of a home help or even for the expenses of a retirement home.