How the reduced interest rate affects you

The lowering of interest rates' implications for you.

The recent decrease in the interest rate by the European Central Bank (ECB) to 4.25 percentage points has potentially negative consequences for savers. While loans are now more affordable, it is uncertain whether this will apply to real estate financing as well.

ECB's decision to reduce the interest rate by 0.25% for commercial banks to borrow money signifies a decline in the savings interest rates from 3.75% to 3.5%. Consequently, the increasing trend of higher interest rates observed in savings accounts and fixed-term deposits over the past nine months has been reversed, as fixed-term deposit rates have already dipped from their peak at the end of last year. For instance, the average German interest rate for one-year fixed-term deposits with German deposit protection dropped from 3.34% in December to the current rate of 2.98%.

Offering competitive interest rates, the Isbank provides a 3.6% savings account for one-year deposits with German deposit protection while the overall average for fixed-term deposits is 2.98%. However, customers can find even more favourable conditions in the European Central Bank. The Cyprus Bank offers an incredibly attractive rate of 5.83% for one-year fixed-term deposits but only covers deposit protection up to €20,000 through the establishment of a deposit protection fund. Italy's deposit protection fund provides deposit protection up to €100,000, and the Banca Progetto offers 3.65% interest for such accounts via Weltsparen.

Furthermore, a strategy for savers known as the "ladder" strategy can be employed, where one's entire savings are not placed in a single fixed-term deposit account but are divided among accounts with varying maturities. In the current circumstances, it is crucial for savers not to invest all their funds in long-term investments.

The interest rates on savings accounts have been decreasing for the second month in a row, with a drop from 1.74% to 1.72%. The pattern of continuously increasing interest rates seems to have ended, and banks' promotional rates of around 4% are temporary. The highest interest rate of 4.215% is offered by the German XTB for just three months, and the Dutch Bunq at 4.024% for four months.

During the evaluation of 317 savings banks by the comparison portal Verivox, only about a quarter (26%) offered interest rates above 1% on their savings accounts, whereas customers generally have to settle for 0.63% average interest rates. 23 savings banks, comprising 7%, do not offer any income on their savings accounts. A similar pattern was observed in the 369 regional cooperative banks, where only 28% of the banks paid at least 1% interest on savings accounts, and 9% (32 banks) would not pay any interest on them. The average interest rate for all savings bank offers is 1.72%.

While savers may be negatively impacted by the recent reduction in interest rates, home buyers can potentially take advantage of this situation as mortgage lending rates are likely to become cheaper. Here, the highest interest rate is offered by the German XTB at 4.215% (limited to three months), and the Dutch Bunq offers 4.024% with a term of four months. Flexibility is vital for savers since they should not solely invest in long-term deposits, as the current economic climate tends to be unpredictable.

Before making any financial decisions, individuals should study savings account comparisons provided by various comparison portals to ensure they receive the best deals available. Ultimately, it is crucial to consider one's personal financial situation and objectives when choosing a suitable account, fixed-term deposit, or savings strategy.

Despite the rate cut, savers can employ various methods to increase their returns. For instance, moving funds to accounts with higher interest rates, opting for a fixed-term deposit with a longer maturity, or diversifying one's deposits across multiple institutions. By doing so, savers can potentially mitigate the impact of lower interest rates. Nevertheless, potential savers must exercise caution and comprehensively research their options.

With the prevalent uncertainty, many question whether savers can still earn interest at all. This question is increasingly being asked due to the global slowdown in bond trading and race to cut deposit yields by banks. Large banks with multiple branches, including Credit Suisse, Deutsche Bank, UBS, and DZ Bank, are cutting rates. Some institutions insist they will maintain rates at their current levels, while others have hinted at possible further decreases. The outcome remains uncertain.

Fluctuations in the economic landscape have frequent impacts on depositors' ability to earn interest on their savings. Banks' reduced willingness to pay significant interest rates on overnight deposits is a clear indication of the rare opportunity provided to savers in recent months. Yet, despite the potential for limited returns, savers can still seek out alternative strategies to maximize profitability.

Consumer loans are still pricey despite the recent decline in interest rates for savers. The higher interest rates on fixed-term deposits indicate that these loans won't become substantially cheaper. In January 2022, the average rate for a 60-month loan was 3.70%. It had already surged to 5.95% by the end of 2022, and as of now, it's at 7.06% on average for that term.

It's worth examining different offers, which vary from 5.18% to 12.67%.

Comparison of loans:

Mortgage Rates:

Mortgage rates have increased considerably since early 2022. The average interest rate for a 10-year loan, according to FMH, is now 3.67%. The rates for these loans range from 3.27% to 4.64% annually.

The ECB's decision affects mortgage rates indirectly. The most significant factor is the interest rates on 10-year federal bonds, which determine the yields for Pfandbriefe, used by banks for refinancing mortgage loans. [

The FMH predicts a potential increase in borrowers' mortgage financing costs. It believes that this is due to the fact that it's not the base interest rate that determines how rates evolve, but the inflation rate. Last month, the inflation rate didn't decline, and it's unclear whether it will in June. It's the ECB's responsibility to maintain a stable currency. If the base interest rate is decreased while the inflation rate doesn't warrant this decision, investors may respond: "German government bond, yes, but only at higher interest rates, if the ECB doesn't ensure a declining inflation rate." Lowering the base interest rate is not a suitable solution. If the 10-year German government bond yield rises due to investors demanding higher interest rates, then the mortgage bond yields and eventually the mortgage rates will also increase.

Those contemplating a shorter or longer interest rate commitment should consider their expectations about future interest rates. If they expect interest rates to be significantly lower in 5 years than they are now, a short-term commitment would be recommended. Conversely, if they believe interest rates will likely increase, a 20-year mortgage insurance might be sensible. Quality assurance comes with a price, but it promises long-term certainty about one's financial obligations.

Comparison of mortgage rates:

Interest rates on overdrafts at checking accounts:

Those who find themselves in a tight spot financially often resort to overdrawing their account and using the overdraft credit to cover their temporary deficiency. This is generally not wise, especially in times of high interest rates. Additionally, rates on overdraft credits continue to be high even after the base interest rate has been lowered, as the banks follow the ECB's lead. The average interest rate on an overdraft credit is currently 12.31%, according to FMH. The rate for overdrawing an overdraft credit is therefore 13.43%. Borrowers should keep in mind that the overdraft credit is typically the most expensive loan from the bank. It should only be used exceptionally and for a brief period.