The era of mega cheap mortgages has come to an end. We warned him at the beginning of April and unfortunately, events accelerated. The Fed and ECB hikes are stronger than expected and should continue. How to anticipate this situation? Is it the right time to buy? What will happen with mortgages? Fixed or variable rates? Experts from several financial institutions answer all these questions.
The alarm bells have been ringing in the main Research Departments for a few months now, warning of an imminent return of the‘Euribor above 0%, after 6 years negative. The most pessimistic forecasts did not put this possibility before November 2022. However, the rise in inflation in recent months and the invasion of Ukraine by Russia have accelerated the return of interest rates to positive territory. , making mortgages more expensive.
Rise of the Euribor: stemming the inflationary spiral
And not only did the Euribor cross above the 0% mark in April, six months earlier than expected, but it could reach 1% before the end of the year and 2% in 2023according to a rapport de Caixabank Research.
Fed raises interest rates even more
For its part, the American Federal Reserve (FED) carried out a historic increase in interest rates, by 0.5%, largest in 22 years. And the chairman of the FED, Jerome Powell, has already predicted that successive increases will be necessary, amounting to half a point at each of the next two meetings, bringing rates to 1.75%-2% from the end of July.
What was exceptional was that we were experiencing a situation of negative interest rates so far
Rising interest rates: don’t panic!
However, the research services of the major banks in Spain remain optimistic. “Fed actions should not be transferred to the European Central Bank – underlines Ana Pitarch, Head of Individual Clients at BBVA. US inflation is out of control and, although it is exerting pressure, the European economy is diverse and heterogeneous. Euribor could reach 1.5% in 2023, but it will not exceed 2-3%“. In other words, the rates will certainly increase, but less than inflation“so there is no cause for alarmr”, confirms Ana Pitarch.
In this context, the financial sector asserts that the foreseeable increase in interest rates by the European Central Bank will have a minimal impact on mortgages. Rocío Rodríguez, from Abanca, even points out that one should not “asee fear of rising interest rates. What was exceptional was what we were experiencing so far, a negative interest rate situation“.
Is it the right time to buy?
For the various experts, now is a good time to buy and there would be no risk of a housing bubble. In this sense, Rocío Rodríguez pointed out: “At Abanca, we believe that now is still a good time to buy a home because, although interest rates are expected to rise, we are still at very acceptable levels. In addition, the rental is already very tight in some areas, making a mortgage a better option“.
Now is a good time to buy as although an interest rate hike is expected, we are still at very acceptable levels
CaixaBank’s Ramon Faura also thinks it’s a good time to buy: “Although there are some dark clouds, the signs given to us by the Spanish economy are very good. In addition, inflation will contribute to an increase in housing prices and, therefore, a reduction in the relative percentage of debt to total assets in the medium and short term. There are therefore good circumstances to buy a house“. Ana Pitarch also pointed out that BBVA does not believe in the existence of a real estate bubble: “We are at minimal default rates, the banking sector is not in the same state as in 2008“.
What will happen to mortgage loans?
Everything leads us to believe that the current macroeconomic context will not slow the supply and underwriting of mortgage loans. “Banks are more than ready for the rate hike – explains Cristina de Marcos, from ING-. I am sure that loans will continue to be grantedas risk policies do not change due to rising rates“. A statement shared by Ana Pitarch, of BBVA, who also recalls that “year-end loan underwriting forecast is better than 2021, although there is some slowdown“.
However, as a spokesperson for idealista points out, “all the banks have already increased their prices, some have more than doubled their rates and others have increased them by around 50%“. On average, he concludes, “we can say that at the beginning of the year fixed rate mortgages could be obtained at around 0.80%-1% and now they are 1.50%-2%“.
Fixed or variable rate loan?
It can therefore be expected that the competition between banks is intensifying, which should prevent rates from rising too steeply. The mortgage battle will take place in particular for the variable rate loans that banks prefer to offer to their customers.
All the banks have already raised their prices, some have more than doubled their rates and others have increased them by around 50%
Thus, according to the Spanish Association of Mortgage Credit (AHE), currently 75% of mortgages in Spain (still being reimbursed) are variable rate, while the rest is at a fixed rate. Consequently, the rise in Euribor will affect three out of four loans.
It is therefore clear that in this situation of uncertainty – or rather of certainty of a gradual rise in the Euribor– it is preferable to choose a fixed rate mortgage as soon as possible, which allows you to pay the same monthly amount for the duration of the mortgage. The advantage? Know from the start the total cost of your mortgage, and avoid unpleasant surprises in terms of financial planning.
Can we change mortgage?
But for all those who already have a mortgage, is it possible to bswitch from a variable rate to a fixed rate? The answer is yes. In fact, given the circumstances and forecasts, it is the most advisable thing to do at this time. That is to say, make the change as soon as possible, before interest rates rise further.
To switch from a variable mortgage loan to a fixed rate loan, it is necessary to negotiate with the bank to modify the conditions variable mortgage contract. This is called the mortgage innovationwhich allows renegotiating the terms of the loan and, among other possibilities, changing the interest rate, for example, from variable to fixed.
Another possibility is the mortgage subrogation. In this case, it is change bank and thus make the changes that we want and that the new bank is ready to accept. In other words, we are taking advantage of this change to renegotiate the terms of the mortgage loan. This is the best option if, for example, we requested the novation of the mortgage from our current bank and they refused it.
It must of course be taken into account that the change from a variable mortgage loan to a fixed loan is not not free. Whether by novation or by subrogation, in both cases, you will have to pay costs associated with each transaction. Their amount will depend on what is established in the contract.
Limited costs thanks to the “ley hipotecaria”
It should be remembered, however, that since the entry into force of the “ley hipotecaria” (mortgage law) of 2019, these costs are limited by law. Therefore, in the case of novation costs, they may vary between 0 and 1% of the mortgage loan. And in that of the commission of subrogation, this will vary from 0 to 0.50%, depending on the age of the loan. It is therefore advisable to take your calculator to see if such a change is worth the “cost”.
Reimburse 30% more over three years
According to current market forecasts, those who will experience the greatest increases will be those who will have to review their loans with a 12-month Euribor reference in next December and January and February 2023, as they will be subject to a one-year increase of more than one percentage point plus the differential. During these months, the peak of year-on-year differences in Euribor would be reached, only to moderate to around 0.23 points in December 2024.
Over the next three years, increases for variable rate mortgages, regardless of the month used as a reference, would be included between 1.8 and 2 percentage points plus the differential. For a mortgage loan of 150,000 euros over 30 years and a differential of 0.99%, this would mean paying between 135 and 150 euros per month more than today, with an increase of 27 to 30%.
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