Mortgage rates increase pressure on home builders and banks

Mortgage rates have skyrocketed since the beginning of the year. Collenda’s banking expert Christian Piller explains why the development could also soon become a problem for credit institutions.

18,740 € per square meter – according to a report in Der Spiegel, that is the average asking price called for real estate on Sylt in the first quarter of 2022. The popular North Sea island is certainly an extreme example, record prices have been called up for concrete gold throughout Germany for years – both in the new construction sector and for existing properties.

The run on the home of one’s own remained high despite the price development. No miracle, lured historic low interest rates with the construction financing for years. However, the days of low-cost financing have come to an end.

Consequences for consumers

The low-interest trend is now threatened by rising inflation – but also the ECB with stricter requirements – to put an abrupt end: “The interest rates are currently running away,” explains Christian Piller, Product Director Banking at Collenda. If at the end of 2021 the home of one’s own could be financed with a 10-year fixed interest rate still with approx. 1 per cent, the interest rate nearly tripled in the meantime to 2.76% – with good creditworthiness of the applicant mind you.

With a 10-year financing of a house in the value of 600,000€ with 2% repayment the monthly credit rate rises thereby from 1,500 euro to 2,380 euro. An increase, which might set many house builders under pressure.

There is no end in sight to this trend: like all interest rates, construction interest rates are made up of refinancing costs, risk costs, operating costs and capital costs. While refinancing costs are rising – as can be seen, for example, from the Euribor – capital costs are also rising at the same time due to the required capital buffer of 2.75%. This is made up of the countercyclical buffer of 0.75% and the sectoral buffer for construction financing of 2%, which will apply from April. A few days ago, ECB chief Christine Lagarde also announced the end of the low interest rate policy for the key interest rate in order to counteract the inflation trend. This is likely to fuel the development once again.

Christian Piller currently recommends that home builders lock in interest rates for as long a period as possible. For existing home financiers, for whom only in a few years the refinancing of the current debt lines up, the admission of a forward loan in such a way specified could be worthwhile itself around unpleasant surprises by a suddenly higher rate despite smaller debt to experience. With this financial product, favorable interest rates can be secured for the future at the present time. A moderate interest surcharge is charged for this.

Consequences for banks

It can be assumed that the number of NPLs will nevertheless increase: According to Mirjam Mohr, Interhyp’s managing director, the number of inquiries and closings in 2022 is even significantly higher than at the end of last year. It seems as if many house builders want to secure the now still supposedly low interest rate before it skyrockets even further.

From Christian Piller’s point of view, banks should currently keep a close eye on the danger posed by loan defaults and check the customer and contract portfolio daily for crisis signals in order to be able to act quickly in the event of payment difficulties. “As Collenda, we are happy to help monitor outstanding receivables with our Open Credit software solution,” says Christian Piller. Based on automated workflows, banks can, for example, set up tailored multi-channel communication to address customers individually and avoid payment defaults.

“We also help in the recovery process,” says Christian Piller. For example, with the calculation of receivables, in foreclosure, the liquidation of collateral, installment payment agreements or enforcement proceedings. Of course, the Collenda solution is linked to the judicial dunning system in Germany.

The only question that remains is: Will the real estate bubble burst if the current trend continues?

Risks have already piled up on the real estate markets, warned BaFin President Mark Branson at the supervisory authority’s annual press conference in early May. The rise in interest rates could lead to a drop in prices. In Germany, residential real estate is overvalued by around 20 to 35 percent nationwide, estimates the Deutsche Bundesbank. The pressure is growing.

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