2023-11-10 13:01:59
No big changes on the horizon, according to the latest figures from the central bank of Luxembourg. The level of interest rates on property loans issued by Luxembourg banks in September remains similar to the month of August. The variable rate thus stands at 4.71%. Fixed rates range from 3.82% for loans over 10 years to 4.37% for loans between 1 and 5 years.
But, over one year, the increase was dazzling. At the same period, in 2022, interest rates were still below 3%. The variable rates still stood at 1.41%.
In such a context, households are more reluctant to borrow. To better understand the impact of rising interest rates on borrowers, we did the exercise of putting ourselves in the shoes of one of them. The objective is to understand, in three questions, what the increase in interest rates implies for a hypothetical mortgage of 500,000 euros.
Read also:
When will interest rates drop again?
How much does a property loan cost in Luxembourg?
Before taking out a home loan, it is important to take into account the total cost of repaying this loan. In fact, to the basic amount borrowed, corresponding to the purchase price of the property and any work, the cost of credit will be added. And with interest rates rising, its weight has increased significantly this year.
For example, borrowing an amount of 500,000 euros over twenty years cost a total of 502,738 euros in September 2022, compared to 715,846 euros in September 2023. And this is without counting the insurance costs which may be added. To better understand this evolution, we have carried out a more detailed comparison, depending on the loan duration.
Who can still afford a mortgage?
The rise in interest rates makes access to property credit more complex for Luxembourg households. Especially since banks can be more demanding on borrowers’ files. Borrowing capacity will depend on the type of purchase made. In fact, the contribution requested will not be the same depending on whether it is a first access to property, a loan for a second home, or a rental investment. Depending on the situation, the contribution can vary from 0 to 10% for a first purchase and up to 20% for an investor.
In addition, the cost of monthly payments must traditionally not exceed 30 to 40% of the borrower’s net income, in addition to other current charges (rent, other credits, etc.). To calculate the salary you would need depending on the loan duration, you can apply the following formula: total cost of the loan / number of monthly payments / 0.3. This again does not take into account possible insurance costs, nor your other charges, but may have the merit of giving an idea of the duration of the loan and the amount that you could bear.
Thus, if we take the example of a loan of 500,000 euros, taken out at a fixed rate over 20 years, the total cost of the loan can be estimated at 715,846 euros, according to the interest rates of September 2023. Income The household’s monthly income should therefore amount to around 9,942 euros at least to have the capacity to borrow over 20 years.
What can you afford in Luxembourg with 500,000 euros?
But, as a reminder, this budget taken as an example, 500,000 euros does not allow you to acquire the same type of property, depending on the place in the country where you wish to invest. Thus, with equal income, equal interest rate and similar loan duration, there may still be large differences between a household which would invest in the capital and a household which would prefer the north of the country, for example. The map below gives an overview of what it is possible to afford in Luxembourg with such a budget, depending on the municipality.
Is the situation the same among our neighbors?
Thus, in the same way as in the Grand Duchy, the real estate markets are encountering difficulties in our neighboring countries. We explained it to you at the beginning of October, in France, the volume of transactions fell by 20% compared to 2022. Same observation in Belgium, where sales fell by 4.2% in the first quarter of 2023 compared to 2022.
The interest rates offered by banks are inevitably affected by the key rates established by the ECB. Thus, in France, Belgium or Germany, the situation is similar to that observed in Luxembourg. Interest rates are historically high.
Will rates fall?
At the end of October, the European Central Bank (ECB) announced that it was marking a “pause” in the increase in the key rate. A first since July 2022. An announcement which, however, does not allow us to foresee an imminent drop in interest rates. The President of the ECB also warned that, faced with inflation, it is too early to talk about a decline. Further increases are therefore not yet ruled out.
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