Inflation high, interest rates rising – Inflation is higher than it has been for decades! The consequence: Rising interest rates for loans. What to do when inflation is high and interest rates are rising? The best idea: buy real estate and do it quickly to secure the favorable interest rates now. What only 1% interest rate change makes, I show you here! PS: In the 90’s interest rates were in the 7%, 8% range, currently you are still financing around 2%, sometimes as low as 3%. It’s about 1) protection against inflation, on the other hand 2) the right time to buy – now! Because, interest rates will continue to rise and rise. Tips for the first loan and for those who are thinking about their follow-up financing.
Those who are looking for tips for follow-up financing can skip this small section! Who wants to finance his first property, whether house or apartment, once again quickly explained:
What does annuity / credit installment mean?
Annuity / loan installment – The technical term “annuity” is your annual repayment to the bank, for a real estate loan. This consists firstly of the repayment (loan repayment) and the interest (cost of your loan). If the interest increases, your monthly loan installment, or annual annuity, increases.
Quickly explained:
Annuity – Annual sum from repayment and interest
Loan installment – Monthly payment (repayment and interest)
What does repayment mean? – Loan repayment
Repayment (repayment of the loan) – The term repayment refers to your loan repayment. With each repayment, the remaining debt decreases and so does the interest.
Tip. Digression – As a real estate owner with financing, you don’t think inflation is so bad. Why?
Typical are (were) 2% repayments per year. With these 2% you finance your real estate over 30 years (every year 2%) and use accordingly also the advantages, which result for you from the inflation (money depreciation). Because 1,000 euros today, are “no longer the same” with 3%, 4% or even 5% inflation in 10 years. Meanwhile, your property value has increased and so has your rental income. Read more about real estate & inflation here.
What does interest mean? – Credit cost
Interest (cost of credit) – Interest is the cost, so to speak, that you pay for borrowing. The basis for the monthly or annual interest costs is the amount of your remaining debt.
In the last 10 years, 15 years, people were mostly counting on interest rates of 2%. That is changing now, because interest rates are rising.
The higher the interest rate, the higher your monthly costs will be
What impact the coming interest rate increases will have on your assets, you can see in a moment in the calculation.
High inflation, rising interest rates, for most this is new!
There has been no increase in the key interest rate by the ECB since 2011. This new situation challenges homebuilders and capital investors and forces new ways of thinking. Let’s summarize the tips once again:
New real estate loan: do not wait long
You should close your loan as soon as possible and as long as possible, that’s the best tip we can give you in times of interest rate turnaround.
Interest rates will rise and the best way to protect yourself from the rate hike, after all you will be paying back the loan for decades, is to take out a loan quickly. Your loan should also run as long as possible, so that you can take advantage of the still favorable interest rates, as long as possible.
You want to buy promptly? Then:
Complete as soon as possible
Conclude as long term as possible
If it is no longer about your first real estate financing, but about the upcoming follow-up financing, I can recommend the following:
Follow-up financing in 1+ years: Forward loan
By means of “forward loans”, you can take the current interest rates today, for your follow-up financing in 1, 2 years.
That’s my tip when it comes time to refinance your home or condo.
You have never heard of a forward loan? Then here quickly explained.
Forward loan = conclude early, secure current interest rates
Forward loan – A forward loan is a typical annuity loan, the only difference is that you take it out one or two years before the end of the current financing. The costs are slightly higher, but you already have the (even more favorable) interest rate fixed now. If the interest rates in two years, than so significantly higher, your follow-up financing will start with the interest rate applicable today.
Follow-up financing in 5+ years: Short term
Unfortunately, a forward loan is only possible in a certain period, should your follow-up financing as first in five, six or seven years, this tip will help them for the current interest rate situation!
Short-term follow-up financing (only 1, 2-year term) and wait for interest rate development.
Typically, you would take out your financing with a fixed debit interest rate, which is as long as possible. Now we are on a low interest rate phase, accordingly it can only go up, especially when looking at the current inflation.
Accordingly, you should only plan your follow-up financing with a short-term term, so that you can react to interest rate changes. If the interest rate then goes down again, you can take advantage of this in your further follow-up financing.
These were the most important tips for buying a house, apartment in times of rising interest rates. Likewise, for those who have already bought your house or apartment and soon have to tackle the follow-up financing.
With these three tips, you can minimize the risks to you and your real estate investment.
Let’s get practical now:
What will a 1%, 2% interest rate change cost you?
Loan example 100.000 Euro for house & apartment
What does an interest rate change mean for your wallet?
Here are two more practical examples with an interest rate change of 1% and 2%, perspective on the coming years. To keep the example calculation simple, we use a financing volume of 100,000 euros. What is the impact of the interest rate change of only 1%, in the first year of your financing?
Credit at 2% (current): 4,000 euros / year
Step 1: Consider borrowing today, with 2% repayment rate us interest rate.
Credit Today:
Credit: 100.000 Euro
Repayment (2%): 2,000 euros / year
Interest (2%): 2,000 euros / year
Annuity (total amount / year): 4.000 Euro
Credit 2023 (3% / +1% increase): 5,000 euros / year
Let’s speculate that the interest rate increase in 2023 will go up to one percent. This would quickly change your yield calculation, because the costs are rising.
Talk about cost increases! Have you heard about the property tax reform? Since 2022, landowners in Germany have been written to and asked to submit new data to the tax office. The goal is to reform the property tax calculation, because it is based on data that is more than 50 years old. Read more about the 2025 property tax reform here.
Now back to increasing your interest costs, which will be incurred in the first year and (depending on the remaining debt) in subsequent years.
2023 Credit (Adopted):
Credit: 100.000 Euro
Repayment (2%): 2,000 euros / year
Interest (3%): 3,000 euros / year
Annuity (total amount / year): 5,000 euros
Conclusion at 1% interest rate increase to 100,000 euro loan:
With only 1% interest rate increase, your costs will directly increase by + 1,000 euros, in the first year alone.
Interest is calculated annually! Follow-up costs
The effect repeats itself in each subsequent year, paying one percent more interest. This means that if you pay off your first 2,000 euros in the first year of your financing (100,000 euros), you will still have 98,000 euros in remaining debt. Accordingly, in the second year you also pay 980 euros more interest to your bank than before.
Year 1 + 1.000 Euro
Year 2 + 980 Euro
..
Accordingly, 1% interest rate increase alone, in the first two years of financing, means additional costs of 1,980 euros.
What would happen if the interest rates on your real estate financing increased by 2%? Let’s take a look at this example: If interest rates were to rise by 2% in 2024.
2024 Credit (Adopted):
Credit: 100.000 Euro
Repayment (2%): 2,000 euros / year
Interest (4%): 4,000 euros / year
Annuity (total amount / year): 6.000 Euro
Conclusion +2% increase:
With only 2% interest rate increase, your costs will directly increase by + 2,000 euros, in the first year alone.
Credit example 500.000 Euro for house & apartment
100,000 euros is not a financing basis for a property in most cities, especially the A-locations and B-locations, where the financing sum is usually much higher. Therefore, here again exemplary the additional interest costs calculated, with a loan amount of 500,000 euros.
Credit at 2% (current): 20,000 euros / year
First of all, let’s look again at the basis, the real estate financing with 500,000 euros at the current interest rate level, of about 2% for the initial financing.
Credit Today:
Credit: 500.000 Euro
Repayment (2%): 10,000 euros / year
Interest (2%): 10,000 euros / year
Annuity (total amount / year): 20.000 Euro
Credit 2023 (3% / +1% increase): 25,000 euros / year
If the interest rate rises by just 1%, this directly means more costs of 5,000 euros per year for you. Shown here in the example for the year 2023.
2023 Credit (Adopted):
Credit: 500.000 Euro
Repayment (2%): 10,000 euros / year
Interest (3%): 15,000 euros / year
Annuity (total amount / year): 25.000 Euro
Conclusion at 1% interest rate increase to 500,000 Euro loan:
With only 1% interest rate increase, your costs will directly increase by + 5,000 euros, in the first year alone.
The interest rate increase of 1% alone provides 5,000 euros of additional costs that you have in the first year of your real estate financing. If interest rates rise by 2%, the additional costs increase to 10,000 euros in the first year of your real estate financing.
Again, if €10,000 is repaid in the first year at the regular repayment rate of 2%, this leaves €490,000 in remaining debt. Accordingly, €9,800 in additional costs and a full €19,800 after just two years.
2024 Credit (Adopted):
Credit: 500.000 Euro
Repayment (2%): 10,000 euros / year
Interest (4%): 20,000 euros / year
Annuity (total amount / year): 30.000 Euro
Conclusion +2% increase:
With only 2% interest rate increase, your costs will directly increase by + 10,000 euros, in the first year alone.
