For everyone who owns one or even several properties, interest rates are one of the central cost factors. Although we have been spoiled by extremely low interest rates for years, some owners may still remember the times when mortgage interest rates were astronomical compared to today – albeit with correspondingly higher inflation rates. Currently, one reads here and there about rising mortgage interest rates due to the resumption of inflation in some countries. But what are the factors that influence the development of interest rates? On its website, UBS recently listed the most important factors that real estate owners should keep an eye on. We summarise them briefly here.

Key interest rates set the pace

Financial institutions that earn their money with interest rates are primarily guided by the key interest rate of the central banks, in Switzerland primarily by the key interest rate of the Swiss National Bank. Their goal is laid down in the Federal Constitution: stable prices taking into account the economic situation. If interest rates are low, investments become cheaper and this boosts the economy.

Inflation controls the flow of money

The inflation rate is an important indicator for setting the key interest rate. Currently, most central banks are aiming for an inflation target of around 2 per cent. Inflation is essentially controlled by the money supply; if it is too high, demand for goods and services rises and with it inflation; if it is too low, the economy shrinks and, in the worst case, slides into deflation.

The economy as a framework condition

Growth stimulates the demand for capital and tends to increase interest rates. According to UBS, the rule of thumb is: “As long as this economic engine is not running at full speed or even sputtering, the central banks will keep interest rates low.”

The expectations of others

Like many other economic developments, such as the stock market, interest rates react not only to real economic developments but also to market expectations. Therefore, central banks communicate in the long term and avoid unexpected reactions. In doing so, they not only calm the money markets, but also want to create a reliable economic climate.

The US Federal Reserve continues to lead the way

Despite China’s growing importance for global trade, the US Federal Reserve and the European Central Bank are seen as pointing the way for interest rate decisions. If these tend towards low interest rates, Switzerland can hardly act in the other direction. This would increase the demand for Swiss francs and the products thus becoming more expensive would worsen the export opportunities of our economy.

The term determines the interest rate

Not every loan has the same interest rate. The longer the term, the higher the interest rate, because the risk for the bank changes with the term. If you line up interest rates according to their maturity, you get a yield curve that normally bends upwards. If this curve runs steeply upwards, it is a sign for rising interest rates; if it runs flat or even downwards, it indicates stagnation or even falling interest rates.

Interest rate forecasts with many question marks

All these factors affect market interest rates – often in different directions. A reliable forecast is therefore fraught with question marks; however, experts can make meaningful assessments with detailed analyses based on economic data. At present, practically all interest rate forecasts tend towards continued low interest rates and thus good times for real estate owners. However, low mortgage interest rates also mean that property prices are tending upwards.