Economy & Politics

The fixed rate wins the favor of buyers

Particularly low interest rates are driving many future homeowners to reject variable rate credit offers. A change in attitude that pushes the banking sector to adapt.

Particularly low interest rates are driving many future homeowners to reject variable rate credit offers. A change in attitude that pushes the banking sector to adapt.

(pj with Zuzanna Reda-Jakima) A low interest rate, monthly payments blocked for a period of up to thirty years: this is the windfall of the moment seized by many individuals. Thus, the fixed rate returns there in the odor of sanctity among buyers of real estate, after having been postponed for years. And the covid-19 pandemic could further stimulate interest in these types of loans.

Indeed, faced with uncertainties, the formula may appear reassuring. Even though they are more expensive in the event of early repayment of monthly payments, these fixed rate loans supplant the variable rate mortgages. “I even expect that customers will have an even greater preference for these fixed rate loans,” does not hide Marc Geib, head of corporate banking services at ING Luxembourg.


Luxtimes, Real estate price speculations, Illiustrationen Immobilienagenturen. Photo: Gerry Huberty / Luxemburger Wort

Until the health crisis occurs, Luxembourg continued to record an increase in the prices of its houses and apartments, according to data released Monday by AtHome. Figures based on real estate ads posted between March 2019 and March 2020.


However, the appetite for fixed rates is not only linked to the floor level of repayment rates. “By taking this type of credit, customers pay for security [des versements fixes]», Continues Marc Geib. And Yves Biewer, member of the executive committee of Banque Raiffeisen continued: “Floating rates are generally a less expensive option, but also mean a fluctuation in repayment for the customer”. A bet with its share of uncertainties therefore.

In contrast, fixed rate credit determines the interest of a loan from the start of the loan period. In fact, the borrower knows the exact amount of what to pay the bank each month. Fluctuations in interest rates (defined by central banks) therefore do not affect the level of payments. This is obviously an advantage when rates go up after signing a loan. However, this has not been the case in recent years, as the monetary authorities have cut rates in the hope of reviving inflation and reviving the economy.

Don’t take any risk

For now, there is nothing to say that interest rates will pick up in the coming months. But even with this prospect in mind, home buyers in Luxembourg are opting for security over lower cost. And the trend started ten years ago, notes the Banque centrale du Luxembourg. In recent months, new fixed rate loans have even outnumbered those at variable rates. “Today, more than 70% of our new loans are at fixed or adjustable rates [taux fixe soumis à des révisions périodiques]. Ten years ago, some 80% were variable, ”says one side Raiffeisen.

Thus, a few years ago, no one questioned the 20-year fixed rates, which were around 5%. “Market conditions have changed in the meantime, and for a similar loan, we would now pay less than 2%, analyzes Yves Biewer. But that’s the price to pay for not taking the risk. ”

On the other hand, we must not neglect the penalties for the early repayment of a loan taken out at a fixed rate. These penalties are calculated as the difference between the refinancing costs that a bank incurred at the start of the mortgage loan and market conditions at the time of the prepayment. However, the Consumer Credit Act 2016 protects homebuyers, stating that these charges cannot exceed the equivalent of six months of interest payments.


The Grand Duchy makes a grand entrance in the ninth study of property in Europe published by Deloitte. While Luxembourg-City is at the top of the price ranking for new housing, Esch-sur-Alzette and the Cité du fer are among the top 10 cities with the highest rent.


At the same time, the 2016 law also caps mortgage eligibility at 450,000 euros. For this amount, what can we expect to buy? A small studio on the outskirts, nothing more. “It is clear that this ceiling is too low for many buyers in Luxembourg”, analyzes Julien Licheron, economist at the Luxembourg Institute for Socio-Economic Research. (Liser). But it is clear that banks are less and less inflexible on the amount of penalties to be charged to their customers. In any case if they wish to keep it in the medium term …

If they are inclined to negotiate penalties, it is also because the banks have more to gain from the loans granted than from the deposits. This time, low savings rates encourage them to lend money and rely on usury for profit. So that makes mortgages a key product that many are trying to sell. And in the field, the competition is fierce. “Negotiations are often at a very advanced level, focusing on mechanisms or financial formulas,” testifies Marc Geib. A growing number of customers also know that they can choose to switch from one floating loan to another.


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