Home mortgage rates in the grand duchy have shot ahead of adjacent countries, raising questions for prospective property purchasers.
For years, Luxembourg has enjoyed borrowing rates for housing that were consistently lower than the euro area average. This has historically positioned the grand duchy as an attractive destination for both local residents and cross-border workers seeking to finance their homes. To illustrate, between 2009 and 2012, the housing borrowing rates in Luxembourg were significantly more favourable than the euro area average.
However, a significant shift has been observed in 2022 and 2023. For the first time in two decades, data from European Central Bank reveal that Luxembourg’s cost of borrowing for housing has not only increased but also surpassed the euro area average.
As of August 2023, Luxembourg’s housing loan interest rate has reached 4.18%, the highest since 2009. This rate is now higher than those of its neighbouring countries: France at 3.31%, Belgium at 3.69% and Germany at 4.10%. This is the first time in 20 years that Luxembourg’s rate has surpassed all three neighbours.
Underlying factors and implications
There are two key factors likely to contribute to this surge in borrowing costs.
First, an imbalance between supply and demand in Luxembourg’s housing market may prompt local banks to raise mortgage rates higher than those in neighbouring countries. High demand coupled with limited supply creates conditions where borrowers might accept elevated costs.
Second, in the context of economic uncertainties and modest growth projections, along with Luxembourg’s inflated housing market, local banks may adopt a more conservative lending approach. This aligns with broader euro area trends where banks are tightening credit standards to sustain healthy balance sheets. Such a shift in risk evaluation provides a justification for higher borrowing costs.
However, this is unfortunate news for prospective homeowners, especially first-time buyers. Increasing borrowing costs present an escalating challenge for these individuals to enter the housing market.
Furthermore, this change may have financial repercussions for both local residents and cross-border workers. They could find it more cost-effective to explore financing options in neighbouring countries like Belgium or France, rather than depending solely on Luxembourg’s local banks. This situation may also compel homeowners with variable interest rates to seek more favourable refinancing options in these adjacent countries.