The European Central Bank has an important meeting on Thursday. It will raise interest rates by 25 basis points for the first time in 11 years, although high inflation and the depreciation of the euro, which recently reached par with the dollar, are putting pressure on the monetary authority to go further. The 12-month Euribor expects the decisive date to be above 1% again in the daily rate. The indicator crossed this threshold in mid-June for the first time in almost a decade, just as the ECB urgently hit after risk premia in southern European countries skyrocketed. It was below 1% throughout July but hit 1.057% on Friday and 1.015% yesterday, bringing the monthly provisional average to 0.934%. Until the decision of the ECB, the market expects strong movements.
The Euribor is significantly higher than a year ago (-0.491%), which is reflected in a significant increase in the price of adjustable-rate mortgages linked to the index. An average loan of $180,000 over 25 years with a margin of 1% it’s time to review it pays $116 more per month or $1,396 more annually. The increase relates to the 4.1 million adjustable rate mortgages in Spain – out of a total of 5.5 million outstanding mortgages. Together they add 400,000 million guaranteed mortgage loans, according to the Spanish Mortgage Association (AHE).
“The depreciation of the euro and mounting inflationary pressures are driving the ECB to be more assertive at its next meeting, but economic risks and rising government premiums are working in the opposite direction,” they comment in MacroYield.
The ECB announced in June that it would raise its benchmark interest rate for the first time since April 2011. The increase will bring the deposit facility to -0.25% (currently -0.5%). Most relevant, however, will be the message going forward, which will likely include some confirmation that there will be a higher rate hike of 50 basis points in September, which will bring the deposit rate into positive territory for the first time since July 2012, which analysts expect assumes that Euribor could reach 1.5% in the coming months.
The Consumers and Users Organization (OCU) advises adjustable-rate mortgage holders to have “a savings margin or sufficient income” to handle the increases. Within half a year, the Euribor rose from a record low by -0.5% to a positive value in April, exceeding 1%.
Rate hike expectations for the next six months are in the high range. “We expect very vertical rises in Euribor as central banks will likely be forced to halt the rises and even cut rates in mid-2023 to restart the economy,” says XTB’s Joaquín Robles.
fixed or variable
In general, banks have raised fixed-rate mortgages from an average of 1.5% to 3% in just six months. Adjustable-rate mortgages, however, offer a smaller spread in response to the rise in Euribor. Faced with the dilemma of what to choose, the OCU predicts three possible scenarios. First, that the Euribor reaches 2% and remains stable in 2024, a case in which the fixed loan is cheaper, with a saving of 4,232 euros compared to the variable one. Second, that it will increase to 2.5% in 2023, gradually decrease to 0.5% between 2024 and 2028, remain stable at 1% for four years, and then increase to 2%. “There are hardly any differences between fixed and variable here,” he says. Third, that from 2026 to 2028 it will rise rapidly to 2.5% and fall sharply to 0.5%, before normalizing at 2%. The variable option would be best, as 1,296 euros less would be paid.
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