The rises in interest rates are putting many mortgage holders in trouble who have seen their installments become more expensive in the last year or fear that they will do so in the coming months. The Euribor, which is the reference index for most variable mortgages in Spain, closed the month of February at an average of 3.534%, when a year ago it was negative. This escalation leads to an upward revision in the interests of the variable rate loans, before which repay mortgage early It is an option to alleviate the debt in those households that have savings. “It is a very profitable operation right now”, says Jordi Paniello, president of the Professional Association of Investment, Financing and Legal Experts (AIF).
Early repayment consists of advancing the payment of the loan, either in its entirety -and thus extinguish the debt- or partially. In the second case, those mortgaged can either reduce the total amount of the debt maintaining the same term but with lower installments or by shortening the number of years life of the loan. In both cases, the volume of interest to be paid decreases, although the bank may charge commissions for the advance payment and it is common for them to limit the maximum amount that can be repaid to 20% of the debt.
For example, in an average variable mortgage with a differential of 0.99 points in which 150,000 euros remain to be paid over 25 years, repaying 10,000 euros early saves between 6,700 and 19,000 euros, depending on whether it is chooses to reduce the term, in which case it would decrease to 22 years and there would be a monthly installment of 835 euros, or if the mortgagee opts to reduce the installment, in which case the term of 25 years would be maintained, but the monthly bill will be It would cheapen something more than 55 euros, up to 780. The Bank of Spain has an online simulator in which both options can be compared.
“It is the most recommended operation as long as you have liquidity,” insists Paniello, who explains that it is difficult to find alternatives in the market to invest savings and that offer greater profitability. “The savings that can be obtained are much higher than the returns offered by other types of investments”, explains the president of AIF. “In this way, your savings are not so diminished and your ability to pay improves by staying with a more comfortable quota,” says Marta Alberni, adviser to the consultancy firm Analistas Financieros Internacionales (Afi).
In fact, the limited profitability of fixed-rate deposits has sparked fervor for public debt auctions. Last month the Bank of Spain had to cancel face-to-face care without a prior appointment for the purchase of treasury bills, before the long queues of interested savers. In the last auction, held last Tuesday, the average interest on twelve-month and six-month bills rose respectively to 3.295% and 3.114%. However, the Euribor maintains its rise and is already around the 4% threshold, waiting for the European Central Bank to undertake a new interest rate hike next Thursday to try to contain inflation that persists above 6%.
“The products with higher returns are not fixed-rate, they have more risk, so you can suffer losses and liquidity can be greatly reduced,” adds Paniello. “The majority of the public in Spain opts for the safest products at a fixed rate and, although Treasury bills have gone up, they still don’t make up for inflation”recalls the co-founder of Círculo Financiero, who also adds that “most entities with the new mortgage law have limited commissions.”
“General trend”
The early repayment option especially benefits recently signed mortgages, since, according to the French repayment system used in Spain, most of the interest on the debt is paid in the first few years of the loan. “At the beginning, very little capital is amortized, what is paid is mostly interest,” explains the president of AIF.
However, Alberni points out that early amortization is already It has been a “generalized” trend in all types of mortgages in 2022, not only in the youngest but also in the oldest credits. “As much as you are not in those initial moments of the mortgage, the rise in rates so intense that there has been at the end affects you, obviously it affects you more the greater the outstanding balance you have on your mortgage, but It is not negligible in any case”Explain.
“It has been a trend that we have already seen during the year 2022,” he says in reference to early mortgage repayment. The financial consultancy attributes this boom to “uncertainty” and the “rapid and intense” rises in interest rates -the ECB has already undertaken five since July-, against which the mortgaged have sought to protect themselves, but also to the fact that Spanish households had accumulated savings during the pandemic. “This has allowed them to be able to make early repayments and, in this way, protect themselves a bit in the face of this scenario of rising rates,” he explains.
“We would have to see to what extent this trend will continue, because that accumulation of savings, after months and months of inflation persistent, is being diminished”, he points out. And it is that early mortgage repayment is only viable in those cases in which the borrower has savings that he does not need to resort to. It would be counterproductive to reduce the debt and be left without the capacity to face a possible future increase in the monthly payment, in a context in which the Euribor continues without giving respite to the mortgaged.