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16012020

Will Condominium Buyers Soon Benefit from Negative Interest Rates?

Due to the monetary policy of the central banks, interest rates for construction finance dropped to a new all-time low in 2019. It is quite possible that interest rates for condominium buyers who take out mortgage loans will drop even further – and perhaps even dip into the negative range. The KfW development bank, for one, already announced its intention to pass the negative interest rates at which it borrows on to private borrowers and corporates. Günther Bräunig, Chairman of the Board at KfW, was quoted by the Handelsblatt business daily with the statement that it is “inevitable; we must prepare to grant promotional loans at negative interest rates.”1
 

As the Handelsblatt goes on to say, this will presuppose resetting the IT system of KfW because granting promotional loans at negative interest would be impossible with the existing system. The same is true for banks through whom borrowers apply for KfW sponsorship. That is why KfW has so far granted promotional loans only at zero interest. KfW wants to use an interim solution to introduce its first transactions involving negative interest rates before the end of the first quarter of 2020; but setting up the final technical solution for negative interest rates is expected to take around one year.
 

Negative Interest Rates Possible Even Today in Certain Cases

Since banks add an extra margin of 0.75 percentage points to the KfW loans before passing them on to borrowers, the latter would probably keep paying a modest positive interest rate nonetheless, assuming the current parameters remain in place. But if KfW itself gets to borrow at yet lower rates, there is an actual chance that borrowers will pay negative interest rates—meaning they would actually receive money—when taking out a KfW promotional loan.

Even today, the child tax credit for first-time home buyers and the KfW redemption grant apparently creates a way for home buyers to obtain their construction finance at a negative effective interest rate, as the Handelsblatt recently demonstrated with a model calculation.2 It is, in any case, safe to say that the funding terms for condominium buyers remain more favourable than ever and will continue to stay that way for some time yet.
 

Steadily Growing Demand for Construction Finance

Meanwhile, Germany’s building societies appear to have seen a spike in business in 2019. The VPB Association of Private Building Societies assumes that the past year registered an increase in paid-out building finance by more than five percent, while the LBS state-owned home-building and loan associations expect a growth of around five percent.3 The sustained strong demand for mortgage loans shows that many households crave homeownership and that they are evidently willing and able to make their dream come true.

A key reason for the demand for construction finance is, of course, the low level of interest, which is why not even the significantly increased property prices in the country’s major centres have caused people to change their minds about seeking financing for a home of their own. Axel Guthmann, the director of the LBS building and loan associations, said that the price situation is driving home buyers increasingly out into the suburbs of the major cities. He added that prices have now started to go up in those places, too, as a result.
 

1 www.handelsblatt.com/unternehmen/leasing/minuszinsen-kredit-aufnehmen-und-geld-dafuer-bekommen-kfw-will-negativzinsen-weitergeben/25221774.html
2 www.handelsblatt.com/finanzen/immobilien/immobilien-baufinanzierung-wie-heute-schon-negativzinsen-moeglich-sind/25356946.html?ticket=ST-50646922-7HK01NJxpEBfVBGmb77k-ap4
3 www.faz.net/agenturmeldungen/dpa/niedrige-zinsen-treiben-das-geschaeft-der-bausparkassen-16556100.html