Real Estate: 5 Reasons to Keep Buying Despite Rising Interest Rates

Even at 4%, it’s still more advantageous to buy a home than to rent one. Here are 5 reasons why!

Mortgage rates are now reaching 4% over 20 years for an increasing number of loan applications, and even 4.5% over 25 years. The era of low rates is over, and borrowers must now accept this reality. After years of historically low rates, many people are questioning whether it makes sense to buy now that rates have returned to the levels seen 10 years ago. However, even at 4%, it’s still more advantageous to buy a home than to rent. Here are 5 reasons from Vousfinancer!

1. Even when repaying a loan at 4%, you’re paying down the principal
When you repay a loan, part of the monthly payment consists of interest, and the other part consists of principal—that is, an amount that will be recovered when the property is resold. The breakdown between principal and interest depends on the loan’s interest rate and term. Although this breakdown has shifted significantly in recent months in favor of interest—even at a 4% rate—a substantial portion of the monthly payment is still allocated to repaying the principal, and after a few years, if the property is resold, a significant portion of the loan will have been paid off.
Example: For a 200,000% loan at 4% over 20 years, excluding insurance, the monthly payment is 1,212 €. In the first year, on average, 555 € goes toward principal repayment and 657 € toward interest payments; starting in the third year, the principal portion of the monthly payment once again exceeds the interest portion. As a result, after 7 years, €52,760 has been paid off and will therefore be recovered in the event of a resale, whereas after 7 years of renting, nearly €102,000 in rent (without taking into account any potential increases, or even less) has been paid with no return… 
“Since mortgage rates have exceeded 3.5%, the monthly payments on a 20-year loan consist of more interest than principal in the first year, but after just a few months, the ratio reverses. And, unlike rent, after 7 to 10 years, a portion of the principal will have been paid off and saved, and can then serve as a down payment for a new home purchase. Even at 4%, taking out a loan means putting money aside without even realizing it!” explains Sandrine Allonier, spokesperson for Vousfinancer.
 

2. Unlike rent, monthly loan payments don’t go up!
When the lease provides for it, rent can be adjusted each year based on the annual change in the IRL (Rent Reference Index), with any increase capped at 3.5%—a limit that has just been extended through March 31, 2024. 
For example, a rent of €1,200 could be increased to €1,241.93 in the first year—and again in subsequent years if the lease allows it—while the monthly loan payment will remain the same for the entire term of the loan, provided it was taken out at a fixed rate, which accounts for 98% of all loans. 
Furthermore, during periods of inflation and rising wages in certain industries or companies, the burden of the monthly loan payment on the overall budget and debt burden decreases, while rent continues to rise. Furthermore, although tenants are protected, they remain subject to the landlord’s will: “Buying offers more security than renting, because you know the monthly mortgage payment won’t increase and the landlord can’t decide to take back the property for himself or to sell it!” Of course, there may be renovations to finance, but they’ll help increase the property’s value—or at least ensure it doesn’t lose value when it’s resold—especially if they’re energy-efficiency upgrades. And there’s financial assistance available for that, such as MaPrimeRénov,” explains Julie Bachet.
 

3. Monthly loan payments may even decrease if it’s possible to renegotiate the loan in a few years
Currently, interest rates are back to their early-2012 levels, at 4%, particularly for long-term loans. However, they could drop again in the coming years: since the summer of 2022, the European Central Bank has raised its rates seven times. That said, in both May and June, the increase was smaller (0.25 percentage points), and once inflation returns to a level close to the 2% target, the ECB could lower its rates again to stimulate growth, which would also lead to lower mortgage rates.
“Even if rates fall by only 1 or 1.5 percentage points in the coming years—to 2.5%, for example—which would bring them back to their level at the end of 2022, it may once again be worthwhile to renegotiate loans taken out in 2023 at rates above 3.5%, since this becomes profitable once the spread reaches 1 percentage point—or even 0.70 when the loan is recent or has a long term, which will be the case for most loans,” says Sandrine Allonier.
Example: A €300,000 loan is currently taken out at 4% over 25 years with a monthly payment (excluding insurance) of €1,583.50. If, in 5 years, interest rates have fallen by 1.5 percentage points—which is equivalent to the increase seen over the past 12 months alone— the loan could be renegotiated at 2.5% over 20 years, with a new monthly payment of €1,434—a savings of €150 per month and a total savings of €35,800 on the total cost of the loan!
 

4. Buying a home is one of the (best) ways to prepare for retirement
Owning your primary residence and having paid off your mortgage is the best way to offset the drop in income that is often inevitable upon retirement. In fact, more than 73% of people over the age of 70 in France own real estate, compared to 61% of households on a national average (source: INSEE). “Housing accounts for the largest share of French people’s budgets. Owning a home and no longer having a mortgage to pay—whose monthly payment, just like rent, often amounts to 30% of income—is a real boost to purchasing power, or at least a way to limit the impact of the drop in income upon retirement,” explains Julie Bachet.
And if a rental investment was made a few years before retirement—with the loan already paid off—the rent received, although subject to taxes, provides a significant supplement to retirement income. 
 

5. Buying a home is also a good form of life insurance and retirement planning!
When you take out a mortgage, the bank also requires you to purchase loan insurance. In the event of temporary disability—that is, a temporary inability to work due to an accident or illness resulting in a leave of absence—the insurance covers all or part of the monthly payment. This is not the case with rent: even in the event of illness, job loss, or other life events, rent payments are still due.
In addition, this insurance also guarantees the repayment of all or part of the loan in the event of a spouse’s death. This insurance thus allows for the transfer of assets to the children, who will not have to continue making monthly payments to the bank or sell the property to repay the loan in the event of the death of both parents. Finally, homeownership also provides access to capital that can be used to facilitate or improve one’s end-of-life care.
“Homeownership provides real protection and also allows for the transfer of assets. Furthermore, it is the best form of retirement insurance, thanks to products such as reverse mortgages: the value of the property can be used to obtain funds for home modifications in the event of a need for long-term care, or to pay for in-home care or a nursing home,” concludes Julie Bachet.