Decreasing interest rates serve as a development – its implications for you.
Due to the ECB decreasing its deposit rate by 0.25 to 3.25%, savers are likely to see their returns dwindle. On the contrary, borrowers might find pleasure in this decision. As for mortgage financing, more information can be found here.
The ECB has decided to lower the interest rate at which banks can acquire funds from it in the euro area by 0.25 percentage points, now standing at 3.40%. Banks who store funds at the ECB will also receive less interest, specifically 3.25%, starting from now.
A thorough analysis by comparison portals has been conducted to determine the implications of this interest rate decrease for consumers. Various sectors, such as mortgage financing, savings, current accounts, and instalment loans, were examined.
Fixed-Term Deposits
The ECB's decisions from July 2022 to July 2023, including February, March, May, and October, led to an increase in fixed-term deposit interest rates. However, this trend has now come to an end. Despite the key interest rates still being at 3.65 or 3.50 before the latest interest rate cut, fixed-term deposit interest rates have already declined before the ECB decision. For instance, time deposits with a two-year term yielded an average of 3.39% in November, but have now decreased to 2.51%. According to an analysis by the comparison portal Verivox, the average interest rates for offers nationwide have fallen by 0.20 percentage points. Over two-thirds of credit institutions have lowered their fixed-term deposit interest rates since September 2022. However, due to the falling inflation rate in Germany (1.6%), the real interest rate for a two-year fixed-term deposit has reached a new high of almost 1%.
The highest interest rate for a one-year fixed-term deposit with German deposit protection is currently 3.350%, offered by Grenke Bank, and is 3.60% at Urbo Bank with a legal deposit protection of up to 100,000 euros through the Lithuanian deposit insurance fund. The average interest rate for fixed-term deposits is currently 2.49% for one year, according to FMH Financial Consulting.
The highest interest rate for a three-year fixed-term deposit can be obtained via WeltSparen with 3.30% from Rediem Capital, Sweden. German Varengold Bank offers 3.15% for three years without a broker. For a 10-year term, Germans can also obtain 3.15% interest at Varengold Bank.
Comparison of Fixed-Term Deposits
Savings Accounts
Banks have responded rapidly to the key interest rate cut in September, according to Verivox. The average interest rate for large banks is currently 1.64%, a decrease of 0.04 percentage points. Savings banks and regional cooperative banks pay significantly lower interest rates at 0.59% and 0.61%, respectively. There has been a slight decrease in interest rates in both market segments by 0.02 and 0.03 percentage points, respectively, compared to September.
The highest interest rate is currently offered by German XTB with 4.215% (for a three-month term), according to FMH. Advanzia Bank offers 3.70% for three months with a fixed interest rate.
Comparison of savings accounts
Installment Loans
Despite relatively high interest rates for savers, consumer loans remain expensive. This is because, despite high fixed-term deposit interest rates, installment loans do not become significantly cheaper. The interest rate for a 60-month term in January 2022 was around 3.70%, but it rose to 5.95% by the end of 2022. Currently, according to FMH, the average interest rate for this period is 7.25%.
It is worthwhile to compare offers as they range from 5.10 to 12.67%.
Comparing Installment Loans
Mortgage Rates
Mortgage rates have significantly increased since 2022. According to FMH, the average interest rate for a 10-year loan is currently 3.35%, ranging from 2.87 to 4.18% per year depending on the provider. The ECB's decision has only an indirect influence on mortgage rates. The most important indicator is the interest rate on 10-year German government bonds, which influences the yields on covered bonds, which banks use to finance mortgage loans.
Max Herbst, owner of FMH Financial Consulting, believes that borrowers may not see lower mortgage rates in the near future. The key factor here is not the development of the key interest rate but the inflation rate. The yield on German government bonds has recently increased, and so have mortgage rates. This indicates that investors are uncertain about the ECB's ability to control inflation. As a result, property buyers should not expect mortgage rates below the 3% mark again soon. The ECB is likely to maintain a cautious approach to keep inflation at a healthy 2% and avoid future deviations.
Considering Long-term or Short-term Interest Rates
For individuals contemplating a longer or shorter period of fixed interest, it's wise to consider anticipated interest rate fluctuations. If you foresee lower interest rates in the subsequent five years, a brief term is advisable. However, if you speculate interest rates to surge, opting for a 20-year fixed rate with a considerable interest rate might be sensible. Security might incur a price, but it promises long-term stability regarding your financial commitments.
Evaluating Savings Account Rates
Overdraft Fees on Checking Accounts
As finances tighten, many individuals find themselves overdrafting their accounts and leveraging the overdraft facility to resolve temporal shortages. While interest rates might decrease, overdraft fees remain elevated, as financial organizations adjust to the European Central Bank's primary interest rate. As reported by FMH, the typical interest rate for an overdraft facility now stands at 11.87%, and for exceeding the overdraft limit, the rate is 13.18%. Debtors ought to comprehend that the overdraft facility on checking accounts generally constitutes the bank's most expensive loan. It should be employed sparingly and briefly.
In light of the ECB reducing the interest rate for fixed-term deposits, individuals may want to reconsider their allowance for daily use and adjust their spending habits accordingly. For instance, if a person had been saving for a new car with the interest earned from their fixed-term deposit, they might need to either delay their purchase or find alternate sources of funding.
Furthermore, families with children might need to reassess their children's allowance, as the decrease in interest rates could impact their savings. They may need to allocate their resources more efficiently to maintain the same standard of living or save for future expenses.
