Mortgage interest rates are on the rise once more. It therefore costs more than a few weeks ago to borrow to buy a house or an apartment: a direct consequence of inflation. And this increase is quite impressive.
A significant increase
In two months, mortgage interest rates have increased by 0.5 percentage points, which is a lot. This means that someone who inquired regarding getting a loan from his bank two months ago, at that time, he was told an interest rate probably around 1.5 – 1.6 %, and today, we are rather around 2%. To give you an order of magnitude, that means that on a loan of, say, €300,000 over 20 years at a fixed rate, that’s an increase of €80-90 per month. The monthly payments increase by 80-90 € per month, so you see that it is not negligible.
Vincent Bada, the boss of the Central Mortgage Credit Center tells us that yes, it is climbing quickly for the moment, especially with the war in Ukraine. “We have had announcements of increases constantly since the beginning of the conflict, so here we go once more in a violent way and we are reaching a peak in this month of April. From memory, it was during the attacks on the twin towers that I had rises like that.”
But the rates are still very low
If we put things into perspective a bit and zoom out, despite these “violent” increases, rates remain historically very low, even if they are going up. To remember, 10 years ago, we still borrowed at 5-6%, so the conditions remain favorable despite everything.
If rates go up like this, it has more to do with inflation in reality, which is itself one of the consequences of the war in Ukraine. As we know, the cost of living is rising very sharply for the moment, there is too much inflation today and that can be dangerous, because in the long run, it weighs on the purchasing power of households. . It is more difficult to buy things, and therefore business income decreases.
The central bank wants to avoid this at all costs. It is even the ultimate goal of a central bank, it is the stability, the predictability of prices. This is the raison d’être of the central bank, particularly the European one, with an objective, even almost a Holy Grail that we repeat over and over once more, it is 2% inflation. Today, we are at 8% inflation. We are therefore well beyond this objective.
What can the European Central Bank do to calm this inflation that we are experiencing today? One of the tools at its disposal is to curb consumption, to ensure that people buy less and companies invest less…n lending them for more. If the central bank increases its interest rates, the commercial banks from which we borrow will pass on this increase in interest rates. And since it costs more to borrow, we will be less tempted to borrow to buy a house, a car, a computer, to consume. Businesses will be less tempted to borrow to invest, buy machinery, construct buildings.
This will allow, as Bernard Keppenne, chief economist at CBC, explains, to regain control of inflation. “The objective is clearly to avoid having an inflationary skid, that is to say inflation that gets out of control, with the clear objective of slowing down investment, to slow down consumption a little by saying that Rising interest rates will be favorable to investments. And so, we want to avoid having too much tension in the economy by acting on interest rates.
Encourage not to spend
Encourage investment, encourage people to put their money aside rather than spending it for the time being, because if there is less consumption, less demand, prices will go down. The circle is complete. It is a way of regulating inflation. In fact, interest rates are the central bank’s main tool for restoring some price stability and predictability.
However, interest rates remain historically low, so this increase should not be exaggerated either. Moreover, this rise in rates decided by the central banks has only just taken place in the United States, and even then, very lightly for the moment. This is just the start of a trend. At home, the European Central Bank will not do so before the end of the year. So the rates remain advantageous, but it’s clear, you have to get that in your head, we’re coming out of a period where inflation was very low for several years. And so, yes, we change the period, inevitably, the rates will go up. Even if it will be gradual and light, interest rates will go up in the coming months and years.
