Interest rate paradox: financing real estate under the microscope

The changed situation in real estate financing has sharpened the focus of prospective real estate buyers. Everyone is moaning about the high monthly burden caused by the sharp rise in mortgage interest rates. But there are ways to reduce the burden. The so-called interest rate paradox offers a little consolation.

The level of financing interest rates is closely linked to inflation. As long as the inflation rate does not move back towards two percent, the European Central Bank will keep the key interest rate high and thus make financing expensive. Economic experts from all over the world expect inflation rates to remain high. This is according to the Economic Experts Survey, a quarterly survey by the ifo Institute. According to the survey, the inflation rate worldwide will reach seven per cent this year, then 5.9 per cent next year and five per cent in 2026.

European markets expect three smaller steps in key interest rates of 0.25 percentage points each until the peak is reached in autumn. Leading financial service providers do not expect the level of construction interest rates to fall significantly in the course of the year, they rather expect a slight upward pressure and strong fluctuations in the coming months.

To reduce the burden of a real estate loan, many borrowers reduce the repayment rate of their loans. Until October 2022, the repayment rate was still two or more percent, since then it has been decreasing. The higher the initial repayment, the shorter the term and the faster the borrower is debt-free.

The amount of interest is also decisive for the duration of the repayment of a loan. The so-called interest rate paradox ensures that the repayment phase is shortened in times of high interest rates. The constant instalment is made up of an interest component and a repayment component. Because the loan amount is repaid month by month, less and less interest accrues on the remaining amount. This increases the repayment by the amount by which the interest burden falls. This is at least a small consolation for the currently high interest rates on real estate loans.

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