Residential property finance: “Banks and customers continue to put safety first”

Berlin, 16 December 2021

vdp analysis shows rise in the share of own funds and slight decrease in the debt burden ratio

Loans extended to finance residential ownership are set to reach a volume of around EUR 270 billion in 2021. This is 8% up on the previous year. Demand for owner-occupied houses and flats is persistently high, and is receiving further impetus from the Covid-19 pandemic, which has given greater importance to having one’s “own four walls”. As a result, owner-occupied homes have gone up in price in recent years. Between mid-2014 and mid-2021, prices rose by an average of 6.6% p.a. This means they increased at a markedly stronger rate than households’ incomes. Whereas it was largely possible, over a long period of time, to compensate for this through the favourable financing conditions, the latest survey conducted among vdp member banks shows that this is no longer the case to the extent hitherto observed, even though interest rates have dropped yet again.

“We are witnessing a considerable increase in the amount of own funds used and stronger growth in incomes of buyer households compared with households as a whole. It is evidently becoming more difficult for less wealthy households to acquire home ownership. At the same time, the borrowed funds ratio (share of borrowed funds) and the debt burden ratio have decreased slightly on average for new loan agreements,”

said Thomas Hofer, Head of Real Estate Finance Division at the vdp and author of the publication “vdp Spotlight: Structures of Residential Property Finance 2021”, which is based on the survey.

Debt burden and borrowed funds ratio down

The borrowed funds ratio fell from 82% to 80%, and the debt burden ratio – expenses for servicing the loan in relation to the buyer household’s disposable income – from 26% to 25%. Compared with the previous survey conducted in 2019, moreover, the relative debt burden fell slightly across all income brackets.

“This is proof of the Pfandbrief banks’ cautious lending practices, which are designed to limit risks,” commented the vdp’s Chief Executive Jens Tolckmitt. “Given the high level of residential property prices, banks and their customers continue to put safety first.”

Banks attach great importance to borrowers’ having an appropriate level of own funds and sufficient financial capacity. In accordance with the Mortgage Credit Directive (Wohnimmobilienkreditrichtlinie, WIKR), they examine whether a possible loan is appropriate for the borrower household.

Longer fixed-interest periods

Buyer households continue to secure for themselves the persistently favourable financing conditions for as long as possible. The average fixed-interest period stands at 14 years. The latest survey shows that the share of loans with a fixed-interest period of up to and including ten years has risen from 27% in 2019 to currently 35%, while loans with an interest lock-in period of more than ten years at present account for 64% (2019: 70%). By contrast, short- and medium-term fixed-interest periods play only a marginal role, making up a share of just under 1%.