Rising Interest Rates Stall Germany's Mortgage Lending Market

The German mortgage market is experiencing a period of stagnation as higher interest rates discourage both homebuyers and those seeking to build new properties. Despite sustained demand for residential property, recent market data indicates that the momentum seen at the start of last year has slowed considerably, and a renewed surge in lending is not anticipated in the near future.

According to industry analysis based on figures from the European Central Bank, German banks extended new loans totaling 59.2 billion euros to private households and self-employed individuals in the fourth quarter of last year. This marked the weakest quarterly result within the year and confirmed a trend of subdued activity in new mortgage business, with lending volumes remaining relatively flat for the third consecutive quarter.

The cooling in mortgage activity is largely attributed to a combination of elevated interest rates and stable to slightly rising property prices. Average ten-year fixed mortgage rates reached approximately 3.9 percent at the end of last year, the highest level observed in over two years. At the same time, housing prices have not seen significant declines, limiting opportunities for buyers looking for bargains on the market.

Current data from financial advisory firms show that mortgage rates are fluctuating between 3.75 and 4 percent, a slight increase from the previous summer's average of 3.6 percent. For prospective buyers and builders, even minor shifts in interest rates can have substantial financial implications, especially when large loan amounts are involved. Experts do not foresee significant changes in borrowing costs in the near term.

The mortgage sector had witnessed a boom up until the spring of 2022, fueled by historically low interest rates. However, a sharp increase in rates, driven in part by global economic uncertainties and the impact of geopolitical tensions such as the conflict in Ukraine, brought a rapid end to the period of strong growth. Escalating construction costs further dampened consumer enthusiasm for new property purchases and building projects.

Following the initial downturn, the market regained some stability, with total new mortgage lending in 2025 increasing by over 20 percent compared to the previous year, reaching 241 billion euros. Despite this rebound, lending volumes remain well below previous record highs, underscoring the ongoing challenges faced by the sector.

While the European Central Bank's key interest rates have remained at moderate levels, broader economic factors--such as rising government debt levels--have contributed to higher capital market rates. This has directly influenced the borrowing costs faced by individual homebuyers as well as institutional investors. Market observers generally agree that a return to the rapid growth seen in the years prior to 2022 is unlikely under current conditions.

As a result, the German property financing market is expected to remain subdued, with prospective buyers and builders facing continued headwinds from both high interest rates and persistent property prices. This environment may prompt some potential borrowers to delay or reconsider their property plans until market conditions become more favorable.