From 1.8% at the end of 2021 to around 3% in April-May 2022: fixed interest rates for long-term mortgages are back at levels not seen in Luxembourg in the last five years. While variable rates remained “stable” in April, at around 1.4%.
This development for now only affects first-time buyers. “If the fixed rate is fixed over 25 years, there is no risk for the client,” reassures Mike Schwörer, head of housing advice at Banque Internationale à Luxembourg (BIL). Even if “the majority of people are torn between fixed and variable rates”.
Beware of variable or adjustable rates
“Those who have taken out a five-year fixed rate and a three-year variable rate, for example, will fall into the market conditions,” says Yann Gadéa, head of mortgage brokers at AtHome Finance.
According to figures from the Luxembourg Central Bank (BCL), which collects information from 49 credit institutions, about two-thirds of the volume is at fixed rates for contracts signed over the last five years and one-third at variable rates. It specifies that in certain cases, “on 20 or 30 year loans, after 10 years, the fixed rate can be reviewed.”
“Customers who have taken out a variable or adjustable rate are also affected,” adds Markus Stegmann, head of lending at BGL BNP Paribas. Although the rise in variable rates (+1 point in March 2022 to 1.33% according to the BCL) is for the moment less spectacular than that of fixed rates, it could follow suit. The European Central Bank plans to raise its key rates in July, which will have an impact on variable rates in Luxembourg.
The fixed/variable split could be redrawn
But are we headed for a reversal of the trend? In 2015, according to BCL data, Luxembourgers started to prefer fixed rates to variable rates. Previously, fixed rates were more expensive. A European law in 2016 “limited the indemnities in case of early repayment of a fixed-rate loan” too, says Schwörer.
"People who last year didn't want to hear about variable rates are now accepting a significant share of variable in their loans," says Gadéa. Today, he calculates about "45% fixed rates and 50% variable rates", the rest corresponding to adjustable rates.
Despite the rise in fixed rates in recent months, "many customers still choose them", BIL relativises. The bank sometimes has to "limit the risk" for the most reckless customers, attracted by the advantageous variable rates. "1.5% today may be 3% in two or three years' time," explains Schwörer. "We have to be careful that the customer can cope, so that they don't get into too much debt.”
Easier to grant credit
Will more credits be refused? "Yes, absolutely," says Schwörer. They might also ask customers to move to a cheaper property. The rising cost of living has already prompted the bank to re-evaluate the amount of money left over after the monthly loan payments have been made when calculating the debt capacity of its customers.
Schwörer adds that there has been a "fierce slowdown in demand" since the end of last year. Rising interest rates are having an impact. "If you're paying €300 more per month for a property, it affects the customer's wallet. The same goes for investors who borrow to rent. "If the gross yield is around 2% and the interest rate is 2.5%, the profitability is no longer the same."
"For all buyers, the cost of borrowing becomes more important because of the increase in long-term market rates," corroborates BGL BNP Paribas.
It remains to be seen how these rates will continue to evolve. "For me, over the year, we're going to see a rise to 1.6% for variable rates and remain at around 3% for fixed rates", predicts Gadéa, of AtHome Finance. "The rise in long-term fixed rates was very sudden, it was an anticipation after the Fed's announcements." He can no longer imagine such movements in 2022.
This story was first published in French on . It has been translated and edited for Delano.