Written by Henk Jansen of Expat Mortgages
What do historically low interest rates mean for you and how can you take advantage?
Record-low interest rates are making headlines all over Europe, while investors scramble with glee to lock in lucrative ventures and patrons watch in dismay as the returns on their bank savings and pensions dwindle to nothing. Such historically low interest rates can be good or bad news, depending on your actions to take advantage of this unprecedented period.
Base interest rates have been gradually lowered to kick-start economic activity in the poor-performing European markets. The main influence has been low inflation across the Eurozone, signalling weak economic outturn, falling demand and limited wage increases. As a stimulation measure, the European Central Bank lowered its Euribor base interest rate several times in as many years, decreasing from 1.50 in July 2011 to just 0.05 in September 2014, the last recorded decrease. While this was good news for new investments, deposit interest rates were also decreased during the same period from 0.75 to –0.20, in theory signifying a negative return on bank deposits, and in reality causing many to lose profitable interest on their pensions and bank savings.
As interest rates have continually followed a downward trend, many investors and patrons are unsure how to act. Expat mortgages explains five consequences of the historically low interest rates, and the positive and negative effects they can have.
Historically low mortgage rates
Against the backdrop of low inflation and forecasts of weak growth, lenders are in an interest race to the bottom to compete in the mortgage markets. As lenders continually cut mortgage rates for short, medium- and long-term loans, homebuyers can lock in record low rates for two, five, or up to 10 years or more, increasing their financial security.
Besides ensuring a certain level of payment stability for several years, it also means in many cases that mortgage repayments are now lower than monthly rental fees. For example, rents in Amsterdam or Utrecht for a two-bedroom apartment in a desirable neighbourhood can be upward of EUR 1,500–2,000, while mortgage repayments can be less than half. For example, independent mortgage broker Expat mortgagesoffers interest rates starting from 2.15–2.35 percent on a 10-year fixed mortgage plan, while short-term fixed mortgage plan-rates can start at less than two percent interest, one of the lowest on record since the effects of the global financial crisis. Homebuyers on a 30-year mortgage plan could thus arrange a monthly net mortgage payment of just some EUR 900 for a mortgage of EUR 285,000.
Lower housing costs
Low interest rates mean buyers have the opportunity to get a lower overall net mortgage, allowing them to reduce their debt burden, which in the case of a 30-year mortgage amortisation, can mean increased lifetime financial stability. Consequently, with lower overall housing costs, homebuyers can opt for a more expensive house for the same mortgage amount.
A survey of interest rates among the largest lenders with NHG found that mortgage rates decreased on average more than 20 percent for variable loans, more than 35 percent for 5-year fixed mortgages, and almost 40 percent for 20-year fixed mortgages, from May 2013 to May 2015. Simply, this would enable homebuyers to consider investing in a house up to 40 percent more expensive for the same mortgage burden they would have been liable for a couple of years ago.
More room for profit on investments
Several leading analytic experts have earmarked the Dutch property industry as the next hot investment market in Europe. This is largely due the rapid recovery in property prices in recent months, after several years of plummeting prices resulting from the global financial crisis and a stagnant housing market.
Dutch real estate experts estimated that property prices in the Netherlands fell more than 20 percent in five years, to reach a market bottom in 2013. But with prices back on the upward trend, property prices were estimated to have risen 3.5 percent in 2014, and 1.3 percent in January 2015 compared to the last quarter of 2014. Property Investor Europe (PIE) reports that this attractive investment situation is garnering much international attention. For example, last year German property group Patrizia bought a portfolio of 5,500 rental homes in the Netherlands, and UK private equity firm Round Hill Capital bought 1,534 property units. With yields estimated at six percent, PIE predict international investment is expected to continue throughout 2015.
As such, now is a favourable time to invest in Dutch property while prices are still relatively low and growth forecasts are strong. Low property prices coupled with lower net mortgage costs leave a lot more room for homebuyers to potentially make a profit in the coming years.
Non-performing bank savings, pension funds and bonds
With the Euribor’s base deposit rate set at negative interest, banks and pension funds have been reluctant to offer much return on patrons’ investments and savings. Low interest rates have spurred a fall in capital market rates, causing losses for stock market players and bondholders. The capital market interest rate on a 10-year Dutch government loan, for example, fell to –3 in 2015, while the average long-term interest rates on 10-year government bonds in the Netherlands decreased from 1.85 to as low as 0.15 (April 2015) in the space of 13 months.
Those with such investments must either wait until markets pick up, which will likely require a long-term investment plan, or move their money to investments with a high return rate. While the low interest rates have had a negative effect on bank savings, funds and bonds, in contrast low interest rates have had a positive effect for first-time buyers, whether for owner-occupied properties, or buy-to-let investments.
Uncertainty how long low interest rates will continue
While mortgage rates are falling to historical lows, the big question is how long will this trend continue? While the forecast changes regularly, several banks reportedly raised interest rates for the first time this year since the interest rate decreases began. Such jumps in the market could signal that interest rates are reaching a bottom and embarking on an upward trend, although as the increases are yet to take hold of the market across the board, time is needed to tell if it is a temporary increase only.
The capital market rates have also seen slight growth in the first quarter of 2015, indicating potential recovery in the market. Since hitting a low of 0.15 in mid-April 2015, rates on 10-year Dutch government bonds rose to 0.81 (22 May 2015), potentially indicating that mortgage rates may rise over time. Experts predict that such an increase would likely influence long-term mortgage rates first. However, while the ECB continues to buy bonds and loans, putting downward pressure on the capital markets, it is likely still too early for a break in low interest rates.
Finally, as inflation rates struggle to meet growth targets, low interest rates are predicted to continue in the short term. Inflation in both the Netherlands and the Eurozone was 0 percent in April 2015, struggling to rise from negative inflation values since December 2014. However, with inflation predicted to rise in the second half of 2015, this could influence changes in the mortgage market by 2016, meaning historically low interest rates will not last forever.
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