Mortgage financing – quo vadis?

1. Jun 2022

In Q1 of 2022, German property prices continued to rise compared to the previous year. Based on the analysis by the Association of German Pfandbrief Banks (vdp), residential real estate recorded the strongest growth, with prices rising by 10.7% across Germany.

1. Real estate prices 2022: rising

Example Frankfurt am Main: New condominiums in the inner city area and in the Europaviertel are trading at average prices of around 15,200 EUR per square meter. According to the appraisal committees, the average price paid for new terraced houses in Frankfurt was €1.3 million. These prices for Frankfurt exemplify high popularity and the demand for residential real estate in highly desirable locations and should be seen as an extreme example.

According to the vdp so far, the prices for owner-occupied housing have also risen due to a stable job market during the pandemic, as well as the associated stable income situation for households.

The economic conditions for financing in the first quarter however, continued to change. Inflation continued to rise and is expected to reach 7.9% in May according to the Federal Statistical Office.

If these conditions remain favourable in the long-term comparison, there has been a significant increase since the end of last year, the last jump in the spring of 2022. Max Herbst of FMH calculates the increase: The interest rates with ten-year fixed interest rates have more than doubled since December – on average from 0.9 to 2.35 percent.

For a loan amount of 362,000 EUR (10-year term, 3% repayment), the monthly installment thus rises from around 1,175 to around 1,614 euros – an additional burden that poses challenges for borrowers in addition to rising consumer costs.

2. Interest rate forecast 2022: rising

Whether there will be further sharp rises in mortgage interest rates remains to be seen. However, most experts do not see any relief for the coming twelve months, but rather the opposite. The inflation rate and the increased yield on 10-year federal bonds are expected to be triggers. This also increases refinancing costs for banks. These would have to shoulder additional capital costs, among other things from the general order of the BaFin of April 1, 2022 in the amount of two percent for risk positions of loans secured with residential real estate. FMH Finanzberatung therefore concludes that “interest rates of four percent this year are not doom and gloom, but very realistic”.

Challenges and opportunities for banks and investors

1. Flexibility in new business

“We support our clients in the processing of new business on our digital processing platform, and are currently experiencing many requests from our connected intermediaries to secure closings for borrowers. This is because many home builders still want to secure interest rates now,” says Eckhard Blauhut, CEO of LOANCOS Group.

2. Management of loan portfolios

Against this backdrop, banks and savings banks are called upon to deal intensively with the effects of the challenging framework conditions. This involves reassessing bank-specific parameters such as risks, profitability, liquidity and capital, adjusting risk models and ultimately also product allocation. Long-term fixed interest rates in particular, are now of interest to consumers.

“We therefore see good opportunities now for the mortgage financing asset class,” explains Lars Schröter, Head of Business Development at LOANCOS. “Whether it is about entering the German mortgage financing market, or about the ongoing management of loan portfolios: We draw on more than 20 years of experience in the lending environment for the German market.”

The companies of the LOANCOS Group handle current loans as well as NPL on behalf of banks, insurance companies and investors.