Margins on home loans granted to Luxembourg households have reached their lowest level in more than 20 years, registering just 0.58% in March 2024. The data goes back to 2003. These margins are of particular interest to banks because they give an idea of the profitability of their mortgage activities. They represent the difference between the interest that banks receive on mortgage loans and the interest costs incurred to finance those loans, including interest paid on deposits and other debt.
Reduced margins
Banks generally adjust their lending margins based on market conditions, changes in interest rates, competition and the general economic environment. In some cases, banks may choose to operate with lower margins on home loans to attract borrowers and stimulate demand for mortgage loans.
Historical data from the European Central Bank shows that Luxembourg banks maintained average margins on real estate loans of around 1.5% between 2003 and 2023, with a few exceptions.
However, the steady rise in mortgage rates for new loans since the start of 2022 has dampened the mortgage markets, leading to negative growth rates in 2022 and 2023. In response, Luxembourg banks have adjusted their margins, notably by reducing initial long-term fixed loan rates. This adjustment likely contributed to the first net increase in quarterly loan volume in Q1 2024 since Q1 2022.
Bank deposits
The ECB’s increase in bank rates as well as mortgage rates also led to an increase in deposit rates. Data from the Central Bank of Luxembourg (BCL) shows a sharp rise in household time deposits, which increased sixfold, from €2.356 billion in January 2022 to €14.903 billion in March 2024, alongside a rise in interest rates from 0.09% to 3.39 % in the same period. On the other hand, the total outstanding loans for the purchase of housing reached 41.032 billion euros in March 2024, reflecting a slowdown since the end of 2022.
Our analysis indicates that this increase in deposits will result in an average monthly net interest to households of around 42 million euros in the first quarter of 2024. At the same time, interest income from total outstanding residential loans granted to Luxembourg households will have amounted to an average of 101 million euros per month in the first quarter of 2024, or almost 75% more than the monthly average of 58 million euros in 2022. In a historical context, the net interest on home loans thus far exceeds the interest paid on time deposits.
In other words, given the current profitability of interest income from mortgages exceeding interest on deposits (excluding other related bank income and fees) and the decline in disbursements of new mortgages, this may partly explain why banks have tightened their lending margins. In addition, banks may expect some fixed deposits to be used for installment payments, which may reduce interest payments on these deposits.
Although it is too early to determine whether the banks will maintain these reduced margins in the medium term, it cannot be ruled out that they will encourage potential home buyers to use available deposits.
This article comes from the Delano Finance newsletter, the weekly meeting to follow financial news in Luxembourg, in English and French. . You can read this article in English at .
