Real estate in Luxembourg: bad times to borrow

Interest rates have soared since the beginning of the year to exceed 2.5% while the ECB is not changing its key rates. Deputy Marc Spautz is moved and asks for explanations.

They sign contracts at interest rates of 2.30%, or even 2.80% for the purchase of their property, while a few months earlier these rates were still often below 1%. “It is more difficult to sell, especially large apartments,” a promoter testified on our articles two weeks ago. In a fortnight, the rates went up again. The phenomenon worries Christian-social MEP Marc Spautz, who questions this rate hike while the European Central Bank keeps the reference rates at an excessively low level, settling at -0.5% for the deposit rate and zero for the refinancing rate.

Under these circumstances, while the interest rate on a mortgage in the euro zone is heavily influenced by the monetary policy of the European Central Bank, how do you explain this year-to-date rate hike in Luxembourg where property prices are already extremely high? And above all, what does the government intend to do to help the families who are now facing this rise in interest rates, especially those who have taken out variable rate loans. The member then asks a couple of questions to the Minister of Finance and the Minister of Housing.

After all, banks in France currently charge a rate close to 1% when Luxembourg is well over 2%. “Which is illogical given the rating of France which is worse than that of Luxembourg,” comments a professional in the financial sector. With a triple A, Luxembourg should actually be lending at a lower level, but that is not the case. “France is an anomaly in the euro zone. Its mortgage rates are the lowest, and that is rather what is not normal when it comes to inflation, ”continues the banker.

If the ECB does not change its key rates, it is to protect the most indebted countries in the euro zone, which could have repayment problems. On long-term mortgages, commercial bank rates are governed by the financial markets and these are currently very cautious, as everyone faces an uncertain future. If inflation is high, rates rise and, according to Yann Gadéa, of the AtHome Finance platform, “the consequence is an increase in monthly payments, which will limit the borrowing capacity. For € 800,000 borrowed over 30 years at a fixed rate, you will have to pay € 155 more each month to repay your loan, ”he warned last January.

The increase is likely to continue

Inflation due to successive crises leads to uncertainty and investors demand higher returns when lending money. This does not yet explain the differences between France and Luxembourg. “Banks in Luxembourg have been making mortgage loans for a few years, it’s not their core business. Banks mainly practice Lombard loans (the bank lends money by pledging part of the assets) to avoid the loan ”, explains the financial sector professional. The mortgage loan is a way for banks to attract customers. The local establishments have other trades.

That said, current interest rates respond to rising inflation, bankers will say. It’s best to simulate your lending capacity every two months to ensure your project is still viable, advises Yann Gadéa. The big question is whether the timing is right to borrow to buy real estate. Difficult to say. But as things are going, rates are still low relative to inflation and the aftermath of the war in Ukraine, which will further deteriorate European economies. Not to mention the losses that some banks may suffer on past deals with Russian partners.

Small borrowers will hear them pass. If banks charge even higher rates in the future, it remains to be hoped that this will lower property prices.

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