MADRID – Since February 2016, the most common floating rate on mortgages has been negative for six years. That came to an end in April this year.
After finishing at 0.287% in May, June closed above 0.8%. The Euribor came in positive in April and confirmed its biggest gain in 14 years in June. Consequently, this confirmed the end of cheap mortgages. This most common floating rate on mortgages has been negative for six years since February 2016.
Mortgages are becoming more expensive due to the tightening of the monetary policy announced by the European Central Bank. Therefore, fixed-rate mortgages are gaining ground. The ECB has put forward that it will raise interest rates by a quarter of a point in July. The same will happen in September, depending on how inflation evolves in the eurozone. This means that the applicable rates will be positive from the third quarter.
The split between fixed and floating rate mortgages has changed over the years in Spain. Mortgages linked to the Euribor, with a variable interest rate, were dominant for a long time. That has now changed. Now, three out of four new mortgages in Spain are taken out on a fixed rate basis. Therefore, only one in four is variable.
In June 2021, exactly one year ago, there were 4,500,253 residential mortgages in Spain. Of these, 940,553 (20.9% of the total) had a fixed interest rate and 3,559,700 (79.1%) had a variable, as shown by data provided by the Spanish Association of Mortgage Lenders, Adicae. Chairman Manuel Pardos explains to RTVE that “the bank has pushed towards fixed interest rates” to maintain its margins on mortgages, its main financial product, during the time the indicator was negative.
The director of Hipotecas.com in Madrid, Marta Fernández, quantifies the impact that the rise in the Euribor could have on a floating-rate mortgage on an amount between €800 and €1,800 per year. An amount that “will not put a family in trouble for default of payment”. Although Fernández is aware that the context is one of rising prices on all sides.
iAhorro’s spokesperson, Laura Martínez, sees a change in marketing strategy at financial institutions. Since April, the bank has been trying to “move demand from fixed to the variable” to make a bigger profit margin, so they raise the fixed-rate and lower the floating rate.
Users can still find fixed-rate mortgages, but the spreads are higher now, so they aren’t as attractive anymore. Where “a few months ago it was possible to find a fixed mortgage below 1%, now they are generally between 1.5% and 2%”.
Improving Banking Margins
At iAhorro they are happy. After all, they are coming from “historic lows” and fixed mortgages “are now starting to rise, but are still below 2014 or 2015 rates. They are still very cheap mortgages, but they are not spectacular anymore”.
Evolution of the Euribor
Looking ahead to the end of the Euribor year, iAhorro estimated 0.5% in January and 1.3% in May, but the evolution of June has led them to revise the data, The year could end “closer to 1.5% than 1.3%”, without excluding an update in July, following the ECB’s decision. AFI analysts confirm that the Euribor is “almost with total probability to close 2022 at levels above 1% (their forecast is 1.3%)”.
Experts warn of how difficult it is to predict the Euribor. The index is highly sensitive to economic and political movements. Historically, it has fluctuated half a point year over year. In January, no one had imagined the war in Ukraine or the current inflation rates. According to Martínez, none of the predictions from then have come true.
“New housing bubble”
Adicae’s chairman warns of the possibility of “a new real estate bubble” and denounces the price increases: “Housing cannot be a speculative asset.” When it comes to getting a mortgage, he asks consumers and banks to take responsibility. “Household over-indebtedness is on the rise again” and, in his opinion, “not being able to pay a mortgage is the worst thing that can happen to a person”.
AFI notes that the rise in rates “may worsen the payment capacity of customers in the medium term, especially of the most indebted households and companies.” The banking sector is maintaining “a degree of deterioration” that is “still latent, which, combined with inflation, could lead to an increased risk of defaults, especially in the most vulnerable post-pandemic sectors where energy price increases could have an impact”.