Homeowners already with loans and buyers looking to mortgage currently face some serious headwinds. The trio of the war in Ukraine, rampant inflation and the shift in the European Central Bank monetary policy has sent interest rates and the cost of living spiralling. As a result, the Euribor currently sits at over 2.2% and inflation hovers in double digits.
None of the above appears to be good news for anyone with a current or new Spanish mortgage. But what is the actual impact on mortgages and by extension, on property prices?
First, the facts
The Euribor, the benchmark for mortgages in Spain, stood at around 2.4% in mid-October. Its highest rate since January 2009. It’s also worth pointing out that until January this year, the Euribor sat in negative territory.
Mortgage statistics in Spain tend to take a while to compile, so the latest official available date back to July. According to the Spanish Institute of Statistics (INE), 35,918 mortgages were approved in July, down 16% in June, but up 2.3% on July 2021.
The average interest rate for these mortgages stood at 2.56%, although the fixed rate was 2.82%. 73% of new mortgages were for fixed-rate interest loans.
The impact on mortgages
Higher interest rates inevitably affect all aspects of Spanish mortgages, particularly the following three:
Higher monthly repayments
The most obvious impact lies in more expensive repayments for variable-rate loans. For example, monthly repayments for a 25-year loan of €150,000 stood at around €530 in September last year.
Fast forward 12 months and the same loan now has monthly repayments of around €730. This increase translates to over €2,300 a year.
Preference for fixed rate
When faced with rising interest and with no real idea of how much further the Euribor will rise, mortgage applicants inevitably turn to fixed-rate loans. Not for nothing is the 75% market share in July a record in Spain.
And this preference comes in light of higher fixed rates, which have risen over 50% since the start of this year. While the average fixed-rate mortgage had an interest of 2.11% in January, this rate had risen to 3.26% by the end of the summer. Analysts believe that 5% fixed rate will appear by the end of this year.
Higher level of early payoffs
Another collateral of rising interest rates has been the increase in the number of mortgages paid off before full term. According to a report from Fitch Ratings, the rate of early payoffs in June stood at 10.9%, “much higher than several years ago”.
Analysts are unanimous that the increase in mortgage interest rates in tandem with rising inflation will have two major effects:
- An increase in default, particularly among households whose mortgage repayments account for over 40% of their income. According to the Bank of Spain, they currently number over 1.5 million, around 15% of all mortgage holders (up from 10.9% in 2020). Expect requirements for lending criteria to tighten in this scenario.
- Fewer new mortgage applications as households realise they cannot afford repayments. Competition among banks will therefore increase and variable-rate mortgages could represent a negligible percentage of the total.
Impact on property prices
Both the European Central Bank (ECB) and the Bank of Spain have noted that in the current context of the rising cost of living and interest rates, property prices are likely to start to cool down.
ECB economists published a report in September, analysing trends in European property markets. They pointed out that rises in interest rates have historically led to a decrease in prices. According to their model, a 1% rise in interest rates leads to a drop of 5 to 8% in prices over two years.
For his part, the Head of the Bank of Spain, Hernández de Cos, referred to “certain exuberance” in the market over the last year on the back of the uptick in sales and increase in mortgage loans. He believes that the sharp rise in the Euribor is already starting to temper the property market.
He points to the contraction in the sales rate in July, a month usually positive for property transactions and a deceleration in property prices during the second quarter.
Latest property price data
In its monthly report for September, the TINSA IMIE Index reveals that prices rose by 0.4% compared to August when they registered a decrease of 0.8%. The valuations company highlights the recent moderation in the property price index.
However, all analysts underline that it’s still early days to forecast real change in the property market trends and that more data is necessary to make an accurate assessment. Nevertheless, higher household debt and fewer mortgage applications will undoubtedly cool demand, which will almost inevitably bring prices down.
INE stats https://www.ine.es/daco/daco42/daco426/h0722.pdf
Bank of Spain warning https://www.abc.es/economia/advertencia-banco-espana-familias-hipotecas-nsv-20221006114708-nt.html
Fitch Ratings report reference https://www.bolsamania.com/noticias/hipotecas/ansia-quitarse-hipoteca-alza-tipos-interes-euribor-desata-amortizaciones-anticipadas–10950212.html
ECB and Bank of Spain market assessments https://www.eleconomista.es/vivienda-inmobiliario/noticias/11974242/10/22/El-Banco-de-Espana-detecta-un-cambio-de-tendencia-en-el-inmobiliario-y-la-vivienda-Habia-cierta-exuberancia.html
Fixed rate stats and 5% by end of year https://www.eleconomista.es/banca-finanzas/noticias/11973566/10/22/La-firma-de-hipotecas-a-tipo-fijo-supera-el-75-y-toca-record-pese-a-encarecerse.html
Tinsa September report https://www.tinsa.es/sala-de-prensa/notas-de-prensa/imie/imie-septiembre-2022/
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