Higher interest rates means mortgage payments increase under a variable-rate contract, putting strain on household budgets. Photo: Shutterstock

Higher interest rates means mortgage payments increase under a variable-rate contract, putting strain on household budgets.  Photo: Shutterstock

The average interest rates in Luxembourg for households to buy homes with an initial fixed rate up to one year have risen to 3.53% in February 2023, up from 1.32% a year ago, according to Luxembourg’s central bank (BCL). This has a remarkable effect on both new and existing mortgage payments. Here are the three main possibilities that banks offer to reduce pressure on Luxembourg households.

Let’s take an example. A house loan of €600,000 at a 1.32% annualised rate for 25 years would have a monthly repayment of €2,349.21, excluding additional charges like insurance and assuming the rate stays consistent for the whole period.

Now, the same loan at a 3.53% annualised rate would have a monthly repayment of €3,013.40, which is a whopping 28% increase. This is a situation that some households with a variable interest rate on their house mortgage are likely facing now.

45% threshold of a household’s net disposable income

When granting loans for house purchases, banks usually set the maximum monthly repayment to not exceed 45% of a household’s net disposable income. To illustrate, if a household has a monthly net income of €5,000 after taxes and deductions, the bank would limit the loan repayment to €2,250 per month to minimise the risk of default in case the household budget comes under stress.

However, in the example above, even though the monthly payment has increased by €664.20, the household would need to increase its net disposable income by €1,475.84 to stay within the 45% limit. For most households, a 28% increase in net income within one year is a significant challenge, leaving many to seek alternative solutions besides selling their residential property.

Delano reached out to four leading housing loan banks in Luxembourg--Spuerkeess, BGL BNP Paribas, Bil and Raiffeisen--to inquire about possible solutions. Speaking with Delano, both Spuerkeess and Bil clarified that they regularly check their clients’ financial situations and work together to find the best solutions suited to individual circumstances in case of concerns. As of the time of writing this article, BGL BNP Paribas and Raiffeisen have not responded.

Prepayment

Charles Pletsch, vice president and head of business unit at Spuerkeess--the largest provider of housing loans in Luxembourg--said that under the current circumstances of steadily rising interest rates, households should make prepayments on their remaining loan amount if they have savings or other disposable income to spare. Not only does this help to bring down the monthly payments, but it also reduces the total amount paid in interest in the event of increasing rates.

Change contract type

Claude Krecké, head of credit enhancement at Bil, stated that switching to a fixed-rate contract is a possibility, which can provide peace of mind for households. Pletsch agreed, but added that it may already be too late as fixed-rate interest rates have also gone up. However, he suggested that placing a part of the loan in a fixed-rate contract could still be a solution for some households.

Term extension

Both Spuerkeess and Bil agreed that extending the initially agreed repayment period is also a possibility, if individual situations permit, to keep the monthly payment at acceptable levels.

Although there are a few additional solutions available, they are only considered under exceptional situations, such as limited-time moratoriums or the takeover of existing personal loans into long-term housing loans. However, it is recommended that households approach their lenders at the first signs of financial stress to find better solutions.

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