Here's why it's getting increasingly harder to get a loan in Luxembourg

Securing credit in Luxembourg has transformed into somewhat of an obstacle course. The country's residents have experienced a dramatic shift in the economic landscape due to the repercussions of the coronavirus crisis and the conflict in Ukraine, making access to credit increasingly difficult.

From soaring inflation to credit crunch

Looking back to early 2022, as the war loomed, the global economy had already begun to slow down. While most Covid-19 measures had been lifted, production had not yet returned to pre-pandemic levels. In contrast, demand remained strong, which proved to be problematic as prices started to soar.

In late February, Russia's invasion of Ukraine triggered a surge in commodity markets, subsequently impacting the wider economy. This trend affected food prices, goods, and services, leading central banks to counter inflation by reducing the circulation of money, thus increasing the cost of credit. Traditional banks had anticipated this shift.

Home loans, once affordable a year and a half ago, have become considerably harder to obtain. According to the Luxembourg Central Bank (BCL), the variable interest rate reached 4.11% in April, compared to 3.89% for fixed-rate loans. These figures are now outdated, as the situation has since worsened.

Vincent Quillé, director of mortgage brokerage firm Nexfin, explains that long-term fixed interest rates have risen from 1.50% to 4.50%. Nexfin's website provides an overview of current rates, which are higher as they are updated more frequently than BCL rates.

"The cost of financing has tripled in nine to ten months," Quillé highlights. Consequently, individuals who could have borrowed €1 million at a 1.50% interest rate a year and a half ago can now only borrow €700,000 while maintaining the same salary.

The decisive criteria for borrowing

In practical terms, banks now meticulously scrutinise loan applications. They closely examine the borrower's solvency, considering factors such as income and available savings for a deposit. Quillé explains that this data helps determine the borrower's purchasing ability. The buyer's profile, including age, occupation sector, and career prospects, along with property-specific characteristics such as value, condition, and energy rating, all contribute to the analysis conducted by brokers and banks.

Quillé acknowledges that financial considerations are not equal for everyone, and there are customers whom both brokers and banks aim to avoid putting in difficult situations. However, this may result in refusals or more challenging loan terms than anticipated, as banks must assess the risk associated with each loan. "But it's not purely to annoy someone," Quillé assures.

Vincent Quillé is co-founder and director of Nexfin. / © Nexfin

Who is affected?

The impact of these changes affects various segments of the population. Despite Luxembourg's attractive salaries, the combination of soaring prices and rising interest rates disproportionately affects young first-time homebuyers who have limited savings and lower salaries, significantly reducing their debt capacity.

-> Flats in Luxembourg City and neighbouring towns: The capital's unprecedented price explosion at a glance

Existing homeowners looking to make further purchases face their own challenges. Some may have previously bought property when prices were rising rapidly and interest rates were low, potentially resulting in significant capital gains. However, securing new financing under the current circumstances becomes considerably more expensive, in addition to the challenge of having to sell an existing property.

Reselling property becomes complicated when confronted with a declining market, leading to fewer potential buyers with limited budgets.

-> Looking for a bargain?: Significant drop in real estate prices recorded in western and central Luxembourg

How can you get a mortgage?

If there are seemingly no political solutions to the problem, how can someone manage to borrow and buy in these difficult times?

Amidst this difficulty, price adjustments serve as the primary variable for market balance, according to Quillé. Reducing the asking price allows for a concession that can facilitate successful sales.

A 10% to 15% decrease in prices already alleviates the impact on debt capacity, enabling some individuals who had previously been deterred from the market to re-enter.

Quillé, drawing from his experience as a broker, asserts that solutions and entry points exist to secure sustainable loans.

Financing conditions vary among banks, with some willing to offer longer terms even for older borrowers. Nevertheless, limitations within the financing market may still pose challenges. Ultimately, the criteria for loan acceptance or rejection remain the same.

In the medium term, the trend in interest rates will play a vital role in making the debt burden more manageable for buyers. Each percentage point decrease in interest rates corresponds to a 10% increase in debt capacity.

Encouragingly, Quillé notes that the property sector in Luxembourg exhibits a degree of resilience, offering hope for the future.