MADRID – Households in Spain are suffering from the rapid rise of the Euribor. As a result of this increase, mortgage costs increase by an average of €100 per month. What are the findings of the experts and what is their advice?
Euribor (short for Euro Interbank Offered Rate) is the interest rate at which major European banks lend each other loans in euros. Euribor is used as a benchmark to determine the floating interest rate for mortgages. Decreases and increases have consequences for the level of the mortgage interest to be paid.
Highest interest rate since February 2015
At the end of May, the Euribor stood at 0.277%, the highest interest rate since February 2015. Interest rates were already rising, but things have been going fast since the war in Ukraine. Moreover, due to the energy crisis, Europe is struggling with inflation of around 10%.
It was also a unique situation that negative interest had been paid on loans for six years (so the borrowing bank received money to borrow from other banks). However, an increase from 0.477% to 0.278% in five months is certainly very strong. Furthermore, there doesn’t seem to be an end to this increase.
“Exceptional and unexpected economic situation”
According to Simone Colombelli, director of Hipotecas de iAhorro (a mortgage comparator like De Hypotheker in the Netherlands) “we live in an exceptional and unexpected economic situation”. He predicts that by the end of 2022 the interest rate will be 1.3%; that is the level of 2012 when Spain was just emerging from the 2008 banking crisis.
In that estimate, he had not yet taken into account the expected intervention by the ECB to raise other interest rates in connection with inflation. That would soon lead to “a 0.5% increase in one or two months,” Colombelli said.
Higher mortgage costs
It is a difficult period for people who now want to take out a new mortgage or for whom the fixed-rate period is about to expire. It is expected that banks will not be keen on fixed-rate periods, but will offer more variable-rate mortgages.
€100 per month more in mortgage
Tribor is not at a level of more than 5% at which it has been in the past. But a mortgage with variable interest now suddenly costs much more. At the moment – according to calculations by iAhorro – a mortgage in interest costs more than €100 per month (ie €1,200 per year) more than a mortgage of €300,000 for 30 years. For many people that is a kick in the teeth.
On the other hand, Colombelli believes that an interest rate of around 1% is not yet a disaster compared to the past. He explains that, of course, last year was an exceptionally favourable period for mortgage borrowers.
The current mortgage market
According to Sergio Carbajal, mortgage expert at price comparator Rastreator, a fixed interest rate is more expensive for consumers due to the higher prices of mortgage banks. The expected further rise in the variable interest rate, however, is causing a rush on fixed-rate mortgages. Many people no longer postpone the decision to take out a new or modified mortgage.
The latest figures from the Spanish Statistical Office (INE) show that 72.7% of all mortgage applications have a fixed-rate period. Financial institutions are trying to encourage floating rate mortgage loans, but the ‘boom’ in demand for fixed rates remains. The recent rise in the consumer price index to 8.7% makes the cost of living more expensive, which has a direct effect on the mortgage market.
The banks make a fixed-rate mortgage unattractive
The financial sector is responding to the rise in the Euribor by offering consumers fixed rates of around 2%, a rate that was normal in 2017 and 2018, Colombelli said. There are still offers of less than 2%, but mortgages with a fixed interest rate of less than 1% no longer occur.
Carbajal shares that view and states that it is still a favourable moment for many who want a mortgage or want to get rid of the variable interest rate for opting for a fixed interest rate. In any case, it is necessary to obtain advice in this changing market to make the right choice on a case-by-case basis. Independent experts can help with that choice and with reading the fine print.
Keep an eye on bank promotions
Colombelli recommends monitoring the actions of banks to promote variable interest rates. For example, there are sometimes good offers among the growing mixed interest types – of only 7 to 10 years fixed interest. He would certainly also recommend this form to young people. It offers stability in the first years in the expectation that, at a later point in the career or after the study, the mortgage with a well-paid job will remain affordable. It is also possible that there are better offers before the expiry of the fixed-rate term.
Refinancing the mortgage is ‘hot’
According to the INE, the number of mortgage transfers (to another bank) has risen to unprecedented heights. The number of applications for a better mortgage rose by 30% in March. However, not included in these figures is the number of people who opt for a modified mortgage with their own bank at the suggestion of the bank; those cases are in fact regarded as new mortgages. In addition to refinancing or full repayment, the mortgage conditions can also be changed with the same mortgage lender.
Colombelli believes the latter is the best indicator of the market; in March, according to the INE, there were 13,934 such mortgage renewals, an increase of 10.8%.