Are Mortgage Interest Rates Likely to Go Down in 2025?
Have you been considering buying a property in Germany but been put off by high mortgage interest rates? Here we look at key market trends to assess whether interest rates are likely to decrease in 2025, making homeownership more affordable.
Housing Market Pressures Remain High
Many young families continue to face significant pressure when it comes to housing. Rents remain high because many prospective property buyers are still hesitant due to elevated interest rates, adding further strain to the rental market.
At the same time, property prices have continued to adjust. Even in metropolitan areas such as Berlin, where prices had been relatively stable, declines of up to 10 percent have been observed in the past year. The question remains: will mortgage rates ease in 2025, making property ownership more accessible?
Will Mortgage Interest Rates Continue Falling?
Interest rates saw some downward movement in late 2024. However, will this trend continue, and is it advisable for potential buyers to wait in hope of further reductions? Could the prospect of property ownership soon become more realistic for a larger number of people?
Of course, predicting interest rate trends with certainty is impossible. However, key market indicators suggest that significant reductions in lending rates are unlikely in the near future. Let’s explore two major factors shaping this outlook.
1. Refinancing Costs Remain Elevated
Understanding refinancing costs is crucial to anticipating mortgage rate trends. Banks finance their mortgage lending through a mix of money markets, capital markets, and Pfandbriefe (covered bonds secured by real estate). Much of this financing is done through debt issuance, and the cost of this debt plays a critical role in determining mortgage rates.
Over the past two years, the European Central Bank (ECB) has engaged in quantitative tightening (QT), unwinding the expansive monetary policies of the past decade. Since mid-2023, the ECB has gradually reduced its balance sheet, selling off large portions of the bonds it had accumulated during the years of quantitative easing (QE). The scale of this process remains substantial: since spring 2023, the ECB has reduced its bond holdings by approximately 15 billion euros per month.
However, as the ECB continues to step back from bond markets, governments and corporations that once relied on central bank support must now seek refinancing from private investors. Unlike the ECB, which previously offered stable conditions, the market now demands higher returns on debt. Bank bond yields, for example, remain above 4.5 percent, significantly increasing refinancing costs for lenders.
As long as refinancing remains expensive, banks are unlikely to lower lending rates significantly. Given that the structural pressures driving these costs are unlikely to ease soon, a substantial drop in mortgage interest rates appears improbable.
2. Key Banking Figures Indicate No Rate Cuts Soon
Another important factor is the behavior of banks themselves. To maintain their customer base and attract new savers, banks must offer competitive returns on savings accounts and fixed-term deposits. If market rates remain elevated, banks will hesitate to lower mortgage rates, as doing so could negatively impact their profitability.
A critical warning came from Belgian Central Bank Chief Pierre Wunsch in late 2024. He cautioned that if markets continue to bet on falling rates, the ECB may be forced to tighten policy again. Similarly, ECB President Christine Lagarde reiterated that the central bank’s approach will remain restrictive for the foreseeable future. While rate hikes may not be imminent, significant cuts are also unlikely.
The Bottom Line: Falling Interest Rates Remain Unlikely
To sum it up, the expectation of sharply falling interest rates in 2025 appears to be unrealistic. While minor fluctuations may occur, structural market conditions suggest that borrowing costs will remain elevated compared to the ultra-low rates seen in previous years.
A rough estimation suggests that if buyers want to maintain similar liquidity conditions to those seen in 2019, property prices would need to decline by roughly 25 percent from their 2022 peak. Instead of hoping for interest rates to drop, prospective buyers should focus on property prices. If a well-priced home becomes available, it may be wise to act quickly before competition increases. If a property seems overpriced, negotiating with the seller may be the best strategy.
