Benefit from inflation when financing real estate
Inflation is characterized by the fact that the value of money decreases while the value of products and services increases at the same time. It is therefore a devaluation of money. This means that higher prices have to be paid for products and services. For property buyers who have taken out a loan to finance their property, this development has a number of implications, as it means that the real value of the debt falls. For this reason, there is a lot to be said for buying a property at this time. The current interest rates on property loans give you, as a buyer of residential property or land, the option of making an investment with a stable value and taking advantage of the growing rate of inflation.
Development of the inflation rate in Germany
Rising inflation rates can currently be observed worldwide. Various triggers are responsible for this. These include ongoing supply bottlenecks, shortages of raw materials and rising prices for fuel and energy. In the eurozone as a whole, inflation rose sharply in the last quarter of 2021 compared to the same quarter of the previous year. The German rate here was around 5.3%, placing it in the European midfield. In January, the inflation rate fell slightly to 4.9%, which does represent a decline, but to a lesser extent than forecast. Furthermore, experts expect the trend to continue and believe that rates will continue to rise in the future.
Effects of currency devaluation on real estate loans
Buyers who have taken out a real estate loan benefit from the effects of inflation, as the real value of the debt falls. How high these positive effects fall depends on several influencing factors. Interest rates are a key factor in the relationship between inflation and real estate loans. Those who have taken out a variable-rate loan do not enjoy the benefits of inflation, as the interest rate is adjusted to the prevailing rate of inflation in this case. Borrowers who have taken out an annuity loan, on the other hand, benefit. In this case, the interest rates are already fixed in advance and have factored in an anticipated rate of inflation. If this increases more than expected, the debt is devalued. Current interest rates for real estate loans should be agreed with the longest possible term so that you can convert the advantages of the devaluation of money into your own advantage. A fixed debit interest rate of 15 or more years is recommended here, as only then will the interest rate be adjusted to the rate of money devaluation.
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That's why investors are benefiting right now
Anyone thinking of buying a property as an investment should put their plans into action now. The advantages that come from the devaluation of money when buying a debt-financed property allow you to benefit from a lower debt value with the right strategy. If you obtain a property loan at a fixed interest rate, you will reduce the real value of the debt, especially if you have concluded a financing contract with a long fixed interest rate. Buyers of real estate as an investment can also benefit from other positive effects. If you conclude an index-linked rental agreement with your tenants that is based on the consumer price index, the rent will increase at the same rate as the CPI. This allows you as a landlord to increase your income in the event of rising inflation rates, as it enables you to increase the rent. This is possible once a year. Another advantage that you can currently take advantage of as a property buyer is the increase in tangible assets in times of inflation. As inflation is expected to continue, the value of the property can be expected to rise. So if you take the opportunity to acquire residential property now, you will also benefit in this respect.
In order to protect your own assets from a real fall in the value of money, it is advisable to make an investment that is as inflation-proof as possible. As the value of money falls and material assets rise in the event of inflation, it makes sense to invest in the latter. Real estate is the first choice here, as it is still considered to be stable in value and inflation-proof. This is also a sensible option for people with little equity, provided you take out a fixed-rate property loan, as a property loan can be advantageous in the event of inflation and the real value of the debt also falls when money is devalued.
Borrowers generally have an advantage when the value of money falls, as the nominal amount of debt remains the same, but the real value of the debt is reduced. This makes it easier to repay the loan. The loan is repaid with devalued money, so to speak.
A devaluation of money ensures that debts fall in real terms. The longer the term of a loan, the more borrowers benefit from the rate of money devaluation. The prerequisite for this, however, is that the salary increases accordingly as the installment increases.
If money loses value, this means that current loans are also devalued in real terms. In this case, borrowers benefit from the inflation-related development. In the case of planned loans, there is a particular advantage if the interest rate has been agreed in advance and the rate of inflation increases more than the lender has calculated. Variable interest rates adjust to the rate of inflation, so you do not have to expect any advantage. It is therefore advisable to take this factor into account when planning a loan.
As money is worth less in real terms in times of inflation, this means that borrowers have to repay less than they have received. The prerequisite for this is that the rate of inflation is higher than was taken into account when calculating the interest rate. If it can be assumed that the rate of inflation will increase in the future, it may make sense to agree a longer repayment period with lower repayment installments.
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