How does interest rates influence the decision between renting and buying

In the 2026 financial world, there is one factor that stands head and shoulders above the rest when it comes to housing: interest rates. Whether you're a starter dreaming of owning your first home or a seasoned tenant exploring the market, interest rates are the invisible hand that tips the balance. In an environment where the European Central Bank (ECB) is constantly aligning its policy with inflation rates, the most important variable in your personal calculation in 2026 will be the most important variable in your personal calculation.

The question “is this the right time?” will no longer be answered in 2026 by just looking at house prices, but by comparing the monthly costs of a mortgage with rising rents. In this article, we analyse how interest rate fluctuations influence decision-making and why interest rates determine more than just your monthly payment.

Borrowing capacity: The bank's calculation

The most immediate effect of rising or falling interest rates is the impact on how much you can borrow. In 2026, the borrowing standards will be strict, and the bank will look at the ratio between your income and the interest obligation.

• The inverse correlation: When interest rates rise, your maximum mortgage decreases. An increase of just 1% in mortgage rates could mean that the maximum loan decreases by tens of thousands of euros for a modal income in 2026. This often forces potential buyers back to the rental market simply because they can no longer finance the home they need.
• The interest rate as a “price brake”: Historically, in 2026, we will see that at high interest rates, house prices will rise less rapidly or even fall slightly. After all, buyers have less budget. For a strategic buyer, a period of higher interest rates can therefore be an opportunity to buy a house for a lower purchase price, provided that they can bear the monthly costs.

The comparison: Net mortgage cost vs. rental price

In 2026, consumers will make the comparison based on monthly cash flow. The interest rate here determines the “price of money”.

• The tipping point: At a low interest rate (as we saw them at the beginning of the decade), the net mortgage burden is often lower than the rent of a comparable home. In that scenario, buying is a financial “no-brainer”.
• The current reality of 2026: With the stable but higher interest rates at the beginning of 2026, the monthly cost of a home for sale is often closer to the rent. Buyers are now looking more critically at additional costs such as maintenance and taxes. If interest rates rise further, renting in the free sector will be the safer option for many to control their monthly budgets.

Psychology and the “Waiting Buyer”

The interest rate influences not only the figures, but also the behavior in the market. We see two clear camps in 2026:

• The fear of a further increase: When interest rates are rising, there is often a run in the housing market. People want to “fix” their interest rate before it gets even more expensive. This temporarily drives competition in the buying market.
• Waiting for the decline: Conversely, if the market speculates on an interest rate drop from the ECB, buyers stay in the rental market longer. They are waiting for more favorable terms, which will further increase the pressure on the rental market (and thus rental prices) in 2026.

The fixed-interest period as risk management

In 2026, choosing the term of the interest rate is crucial.

• 10 versus 20 years stuck: In the face of an uncertain interest rate forecast, many buyers opt for 20-year safety in 2026. Although the interest rate for this is slightly higher, it offers protection against future inflation shocks.
• Rent as the 'variable' option: In fact, renting is like a variable interest rate; your monthly payments can increase each year due to indexation. Buyers who fix interest rates for a long time create an anchor in their finances that tenants don't have.

Table: The influence of a 1% interest rate differential on an average mortgage (2026)

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Attribute                                                         Scenario A: 3.5% interest                 Scenario B: 4.5% interest                 Difference

Maximum loan                                       € 450,000                                         € 415,000                                        − € 35,000

Gross monthly payment                       € 2,021                                              € 2,103                                            + € 82

Net monthly payment (after HRA)        € 1,580                                            € 1,620                                             + € 40

Repayment in year 1                              € 706                                               € 540                                               − € 166

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The role of the mortgage interest deduction (HRA)

In 2026, the mortgage interest deduction will remain an important mitigator of higher interest rates. Because the deduction is directly linked to the interest paid, the tax authorities absorb part of the interest rate increase for the buyer. A tenant does not have a comparable tax advantage in the free sector, so the effective “pain” of rising interest rates for a buyer is often less than the rising rents for a tenant.

Interest rates and the new construction market

The interest rate also influences supply. In 2026, we will see that project developers are more cautious when interest rates are high, because they must guarantee their own financing and the saleability of the homes.

• Less supply, higher rent: If less construction is carried out due to high interest rates, scarcity increases. This drives up rents, which often makes the decision to buy (despite the high interest rates) more attractive. It is a vicious cycle that will firmly grip the housing market in 2026.

Final thought: Strategic choice in 2026

The interest rate is the most important thermometer in the housing market. A low interest rate encourages buying and building wealth, while a higher interest rate emphasizes the flexibility of renting. In 2026, it's essential not to focus on today's interest rate, but to look at the long-term impact on your disposable income.

Those who can buy at a stable interest rate build up wealth while real debt evaporates due to inflation. Those who rent pay for the absence of interest risk. In the current 2026 market, interest rates are not just a cost, but the most important guide to your living career.