German mortgage rates target 4% on heavy government borrowing

Germany's mortgage market is entering 2026 with financing costs rising, not falling. The European Central Bank held its deposit rate at 2.0% at its final meeting before Christmas, confirming what lenders already knew: the easing cycle has ended. Yet mortgage pricing continues to climb regardless, driven not by central bank policy but by long-term government borrowing and bond market funding costs.

By late December 2025, ten-year fixed construction loans were priced at 3.7% to 3.8%, the highest level in two years. Borrowers financing at high loan-to-value ratios were already paying 4% or more. Most forecasts now point toward mortgage rates settling near 4% through 2026, with several intermediaries modelling 4.5% as a realistic peak.

Bund yields, not ECB policy, now set mortgage pricing

The shift in mortgage pricing reflects a fundamental change in what drives household borrowing costs. Long-dated German mortgages are funded largely through Pfandbriefe, priced off ten-year Bund yields and covered mortgage bond spreads. As Germany prepares for heavy federal debt issuance in 2026 to finance infrastructure and budget spending, funding costs remain under upward pressure.

The 2026 federal budget assumes €524.5bn in expenditure, €98bn in net borrowing and €181.5bn in new debt issuance—the second-highest figure in the history of the Federal Republic. Max Herbst of FMH-Finanzberatung described the direct link: "The level of construction interest rates depends directly on the perception of the federal government on the capital markets. We have to borrow a lot of money, the economy is not doing so well—these are all factors for which large investors demand a risk premium."

For borrowers, the arithmetic is stark. A 0.7 percentage point increase on a €400,000 mortgage adds roughly €230 per month in interest cost, or €27,600 over ten years. That is the scale of impact now being priced into household financing.

A December Interhyp expert panel found that 67% of respondents expect mortgage rates to rise further in the first half of 2026, while 33% see rates holding near current levels. Mirjam Mohr of Interhyp framed it simply: when government borrowing rises, yields rise, and construction financing has "little room for downward movement." ING chief economist Carsten Brzeski reinforced the message: the era of rate cuts is over, and the key influence on mortgage pricing is now government debt across Germany and the eurozone.

Price offset narrows but timing still matters

For borrowers, one factor provides partial relief. Although mortgage rates have climbed back to autumn 2022 levels, property prices have not. An Immowelt analysis of 80 major cities shows that 63 have still not regained their 2022 peaks. In Munich, Stuttgart, Frankfurt, Ingolstadt and Freiburg, buyers now pay €100 to €200 less per month for comparable properties than they would have three years ago, despite equivalent interest rates.

This gap between firmer rates and softer prices offers a workable entry point for households with steady incomes and adequate equity. The lending market is responding. Real estate loan volumes increased 18.2% in the first nine months of 2025 compared with the previous year, with growth accelerating to 20.4% in the third quarter.

Florian Pfaffinger of Dr. Klein noted that banks often trim margins in January to rebuild loan books, which could create a brief window for top-tier borrowers to lock in rates slightly above 3% for ten-year fixed mortgages. But he stressed that sustained rate relief is unlikely without a notable economic slowdown.

Brokers emphasise that comparing offers widely and opening renewal discussions early will be critical for borrowers approaching the end of fixed-rate periods in 2026. Banks often present rollover offers only shortly before expiry, and several experts warn that these can be well above competitive market levels. Equity improves terms but does not eliminate the effect of higher mortgage funding.

The government has reactivated €800m in low-interest KfW loans for EH55 newbuilds that rely entirely on renewable heating. The funding pool is expected to be allocated quickly, but the programme's reach is narrow. KfW loans currently represent close to 8% of mortgage volumes.

The outlook for 2026 looks clear. Mortgage rates are now driven by Bund yields, shaped by government borrowing rather than monetary policy. The expert consensus is unified: rates will settle close to 4% through next year, with 4.5% treated as a realistic upper range. A sustained fall is not widely anticipated without a notable slowdown in the economy. Buyers waiting for significantly cheaper finance risk waiting in vain.