Interest rates are rising rapidly
Which Fixed Interest Rate Is Best Now?
05/12/2022, 09:09 (updated)
Especially in times of soaring interest rates, extremely long fixed interest periods could be useful. However, according to FMH-Finanzberatung experts, customers also need to keep other factors in mind when choosing their bank.
This has never happened before. In less than six months, building interest rates in Germany have more than doubled: since Christmas 2021 they have risen from an average of 0.9 to 2.5 percent. And there is no end in sight of the upward trend. On the contrary.
This poses a number of problems for customers who are currently in need of funding. Not only do they have to try to get the cheapest loan possible as quickly as possible. They must also think about how to arm themselves for the whims of interest rates that are yet to come and choose the appropriate fixed interest rates.
Arithmetic helps, but only to a certain extent
Suppose a customer buys a property for 500,000 euros and needs a loan of 350,000 euros. It chooses a ten-year fixed interest rate and repays three percent of the loan amount per year. According to the FMH database, it is expected to pay a monthly fee of 1502 euros for the cheapest provider (starting May 2022). The borrowing rate would be 2.15 per cent. After ten years, however, our client would still have EUR 232,975 in debt – and possibly a problem with subsequent financing. Depending on how high interest rates will be in 2032.
To avoid this dilemma, our client could also secure an offer for 20 years. The payable interest would then be higher, at 2.65 percent, and the repayment less than 2.5 percent. But our client would have the same monthly rate. And after 20 years, a residual debt of 119,575 euros.
Which Fixed Interest Rate Is Better Now?
The FMH Fixed Interest Rate Calculator can be used to calculate the interest rate increase after ten years, so that both variants have the same residual debt after 20 years at the same rate. In our example, this borrowing rate is 3.71%. This means that anyone who believes interest rates will be over 3.71 percent in ten years should definitely choose the 20-year fixed interest rate.
In any case, those who opt for the long fixed rate have greater planning security for the same monthly charge without significant risks. Because after 10.5 years, every client has the legal right to terminate the loan, which he can use if interest rates are low again.
However, it is worthwhile to carefully compare the terms of long-term loans. On behalf of ntv, FMH-Finanzberatung then determined where buyers are currently getting the best interest rates for loans with a fixed interest period of 20 or even 30 years.
Stay safe and flexible
However, it is important not only to pay attention to interest rates when concluding a long-term contract. Therefore, in its analysis, FMH also highly considered flexibility in the form of special refunds and refund changes, which allow customers to react to positive or negative financial changes in this very long time. If you look closely here, you can secure very good deals even in these difficult times.
Among banks and insurance companies, Signal Iduna, DEVK and Postbank shine with the 20-year fixed rate. All suppliers deserve a “very good” or “good” from the middlemen.
If you want to protect yourself for 30 years, it is best to turn to one of the brokers who have been rated very good. With a two percent repayment per year, the rate for a loan of over 350,000 euros is only 1,475 euros per month to be debt-free until the end of the fixed interest period.
In this constellation, the interest rate would have to be 4.35 percent after ten years to get the same figures as the 30-year fixed interest rate. This scenario is conceivable, but ultimately, in addition to simple math, it will also decide your own need for security.
You can find the current long-term construction rates in NTV’s Construction Loans Comparison.
(This article was first published on Monday, May 9, 2022.)