How do you plan your home loan project in the face of rising interest rates?

War in Ukraine, the economic slowdown, soaring inflation: in these uncertain times, it's not always easy to make the right decisions, especially when they concern home loans. What should you look out for if you want to become a homeowner or if you still have a loan to repay? To answer this question, it is first essential to understand why mortgage rates, particularly variable rates, are currently rising.

Variable rates: myth and reality  

Contrary to popular belief, there is no direct link between the rise in key rates by the European Central Bank (ECB) and the increase in variable rates on home loans in Luxembourg.

A few words of explanation are in order. The ECB's mandate is to stabilise prices within the European Union. When inflation rises too quickly, as is currently the case, the ECB raises its key rates until the high inflation is brought under control. The rates set by the ECB can influence the interest rates offered by banks to individuals and businesses, but they are not the only ones. In a market economy such as that of the euro area, rates also depend on the supply and demand for credit, in other words the amounts that companies wish to spend and invest, and the total mass of credit available.

The situation is slightly different for home loan rates. It is true that Luxembourg banks, like other European banks, obtain financing from the ECB, but rarely for this type of loan. The variable rates used by banks in Luxembourg are floating rates that are not linked to a particular market benchmark such as the key ECB rates[1]. In other words, each bank is free to adjust the variable rates on its mortgages upwards or downwards depending on a number of factors specific to each bank: refinancing conditions, the rates offered by competing banks, the balance sheet approach, the cost of liquidity and so on. Market conditions may therefore vary from one bank to another, and each bank may assess them differently.  


A bank may therefore decide to adjust the variable rates on its mortgages upwards or downwards in a way that does not replicate moves in the ECB's key rates, or to make the same adjustments as the ECB, but with a time lag. Everything will depend on the bank's internal commercial policy. Your borrower profile will also have an impact on the level of the interest rate.  

Now that you understand a little more about the factors that influence rates, you can minimise the negative impact on your situation.

[1] Be careful not to confuse variable rates with revisable fixed rates. A revisable fixed rate is a rate that remains fixed for a specified period (3, 5 or 10 years) and is revised at the end of this period. Unlike the variable rate, the revisable fixed rate is contractually correlated to the 6-month Euribor, a benchmark index used by banks to set interest rates in the euro area. 

If you want to become a homeowner

1.   Size your project according to your borrowing capacity and your ability to repay. At ING, we offer a loan simulator which gives you a general idea of what your monthly loan repayments would be in just a few clicks. All you need to do is enter the overall cost of the property, the amount of up-front funds you have, the duration of the loan and the type of rate that suits you best.

2.   Be patient and don't rush. It's better to let an opportunity pass than risk getting in over your head!

If you are a homeowner and still have to repay a variable-rate loan 

1.   Ask your banker for more information. Discuss with him or her whether it is possible and financially worthwhile for you to renegotiate your loan and convert it to a fixed rate, even if only partially. Fixed rates have the advantage of greater security and predictability.

2.   Assess the impact of rising variable rates on your finances. If you think that sooner or later you may have difficulty repaying your loan, contact your banker immediately. He or she will help you find a solution. Remember: each bank has its own commercial policy and always takes your profile into account before making a decision.  


To find out more about home loans, visit our dedicated web page and make a video appointment!


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