Navigating Home Purchases in a Busy Era: Techniques to Fine-tune Your Deal
Sometimes, interest rates marginally increase: Recently, inflation in Germany was remarkably low at 1.7% for three weeks, and the European Central Bank has adjusted key interest rates.
However, the expectation that interest rates for construction in Germany would decrease considering these circumstances was not met. Purchasers should not anticipate significant reductions in the nearest future, but rather prepare for interest rates to remain stable or even incrementally rise for the present.
This might be disheartening. Nevertheless, individuals aware that an increase of 0.25 percentage points on a 400,000 euro loan equates to additional monthly expenses of 83 euros will likely not need to alter their purchasing plans. This is particularly true as escalating property prices put a substantial strain on the budget.
Those aiming to acquire a home currently enjoy favorable conditions. However, potential buyers should not linger in their search, as the demand for construction financing is drastically increasing - implying the imminent price hikes for homes and apartments is inevitable.
The Aftermath of Insufficient Construction
The situation is worsened by the scarcity of new building projects. According to data from the Federal Statistical Office, only 85,300 residential units (residential properties and owner-occupied apartments) were approved in the first half of 2024, 23.5% or 26,500 fewer than in the first half of 2023. As suggested by the federal government, we require approximately 400,000 new apartments in the coming years.
The results could be observed on both the rental market and property prices. Since construction is scant, yet demand grows, rental rates also increase due to inadequate supply. People with the means will inevitably consider purchasing a home in such a scenario. Demand is also on the rise here, hence costs escalate.
The Impact of Increasing Property Prices on Financing
The substantial impact of soaring prices (versus a modestly rising interest rate) on financing can be comprehensively demonstrated in the following calculation. Even if the price of an apartment rises by just 2%, the object now costs 510,000 euros instead of 500,000 euros.
Since many buyers in this situation cannot suddenly produce an additional 10,000 euros for equity, they must expand the portion financed - which results in higher interest rates due to the higher loan-to-value ratio, although the interest rate itself has not been affected.
Suddenly, the monthly rate increases substantially by 143 euros. After ten years, this results in additional costs of approximately 24,000 euros – including a significantly higher remaining debt that still needs to be repaid.
Effects of a 2% Increase in Purchase Price
The Role of a Broker
Those seeking appropriate financing in the present environment would benefit from cooperating with a skilled construction financing broker. The reason: Generally, brokers collaborate with at least 300 to 400 different financial institutions through various platforms. Hence, if a particular bank can no longer sustain the initial interest rates due to altered circumstances, a skilled broker often has an alternative ready.
What Sets a Skilled Mortgage Broker Apart?
FMH Financial Consulting has developed a catalog comprising over 100 questions to assess the customer-orientation of mortgage brokers and their specific services.
The experts in Frankfurt have evaluated the expertise of individual brokers – as brokers frequently receive training from financial institutions. The focus of this test is exclusively on the service mentality and the quality of service provided to the client. Which documents does the broker share digitally? Is the loan agreement explained or simply sent? Does client assistance conclude with loan approval? What happens if the bank experiences difficulties with notary processing? Does the broker also assist the client in such problematic scenarios and support them until the loan is disbursed – and beyond?
A list of brokers who have already been tested and have received the certificate for customer-oriented mortgage brokers can be found here.
Max Herbst is the owner of FMH Financial Consulting, which has been providing impartial interest rate information since 1986.
In light of the increasing demand for construction financing and anticipated interest rate adjustments, it would be advisable for potential homebuyers to seek the assistance of an experienced construction financing broker. This is because brokers can provide access to various financial institutions and may offer alternative options if initial interest rates change due to altered circumstances.
Given the substantial impact of rising property prices on financing, it's crucial for individuals to carefully consider their options and seek professional advice when deciding on a mortgage. A reputable broker can provide valuable guidance and help navigate the complex process of securing appropriate financing, given the current market conditions.
