Interest rate forecast in 2021
The general market situation is the strongest factor that determines your German mortgage interest rate. In 2021, actors that will influence the market are: the ECB, the key interest rates and the US Federal Reserve (Fed). All favor a longer-lasting upward trend.
The ECB’s main role is to ensure price stability in the EU. To do so, the ECB uses two tools: the key interest rate and the bond purchase program.
Current ECB policy
Until the inflation rate reaches 2%, the ECB will keep the key interest rates low and buy up government bonds. Due to geopolitical factors, including the threat of protectionism and uncertainties of Brexit, the forecast on economic growth remains gloomy in the EU. As evidence by the economic performance in the second half quarter of 2018, the euro zone recorded the lowest pace of growth in four years. The ECB also sharply cut its eurozone growth forecasts for 2019 from 1.7% to 1.1%. Given that there are growing concerns about economic growth within the eurozone, it's unlikely that the ECB would increase the interest rate in 2019.
The key interest rate
The key interest rate directly impacts mortgage rates. First, banks refinance mortgage lending by selling mortgage bonds. Second, the interest rate of these bonds depends directly on government bond rates.
Interest rates in Germany
With the German economy doing relatively well, the demand for German government bonds is currently high. As a result, their current interest rates remain low. In turn, that drives low interest rates in Germany banks across the country. And this will likely continue throughout 2019. Therefore, if you plan to buy property in Germany this year, you will probably be benefited from the low interest rate.
The Federal Reserve
In 2019, the Fed is expected to continue to raise its current interest rate up to 2.5% by the end of the year. The Fed’s move makes US investments more attractive, so investors are moving their capital from the euro area into the dollar area. This puts the ECB under pressure to bring the key interest rate up, but current EU data does not favor this decision.
How have mortgage interest rates developed in Germany?
Mortgage rates have been decreasing by 4% in Germany since 2008.