Since the Euribor began its unstoppable takeoff in the second half of 2022, the four million Spaniards who have contracted variable mortgages have started to tremble. The indicator that defines the monthly payment that seven out of ten mortgaged people pay for their loan has taken an unprecedented leap in the history of the euro. However, not all families are noticing it equally. In fact, the most recent mortgages will experience an increase in their monthly payment up to 11 times higher than the oldest ones.
For an average mortgage (150,000 euros to be paid in 25 years, with a differential of 0.99 points) that is updated each year with the Euribor for January, the monthly fee has skyrocketed between 26 and 289 euros per month after the last revision. The first figure corresponds to a loan signed in 1999 and that will be paid off at the end of this year, while the second is what a household that signed with the Euribor in January of last year will have to face.
In between these two figures there are as many cases as there are years pending on the mortgage that remain to be paid. For that same example of a typical loan, Those who signed with their bank after 2016 face monthly fee increases of more than 40% (between 216 and 289 euros per month) with the review of January of this year. For loans signed between 2007 and 2015, increases range between 20 and 40% (increases from 119 to 204 euros) and for those formalized between 1999 and 2007, increases of between 4 and 20% (from 26 to 119 euros more per month).
The reason why there is so much disparity in the impact of interest rate increases has to do with the formula used in Spain to calculate the mortgage payment paid each month: the French amortization system. With this formula, most of the interest on the debt is paid in the first years of the loan, which causes the monthly installments of the most recent mortgages to rise much more than the old ones when the Euribor shoots up. As the debt is reduced, the effect of the interest rate increases is diluted. Not surprisingly, it is very different to have to pay 3% interest on a debt of 150,000 euros that has just been released, than on another of which there are barely 8,000 euros left to repay.
The lifeline of the fixed type
The rise in the Euribor that has been experienced in recent months is unprecedented. In January of last year, this indicator stood at -0.48% one year, and just twelve months later, it already reached 3.34%. If this takeoff of the Euribor had occurred when the real estate bubble of 2008 burst, the consequences would have been even more dramatic than they were then.
However, although many households are already experiencing financial difficulties due to the rate hikes, the current context is very different. Mainly for two reasons. First, because in recent years, far fewer mortgages have been signed that during the boom real estate. Except for a last-minute surprise, 2022 will close with some 450,000 new mortgages, the highest since 2011. As a comparison, between 2003 and 2007 more than 1 million loans were signed per year.
And secondly, because in recent years the proportion of fixed-rate loans has skyrocketed. In 2022, 71% of the formalized mortgages were at a fixed rate and since 2018 the proportion has not dropped from 39%. The fact that a good part of the new loans are at a fixed rate -with constant installments- contributes a lot to cushioning the effect of interest rate increases on households.
Rains, it pours
The effect of the rapid rise in mortgage prices adds to the erosion that inflation has already produced in the pockets of households. Although price rises have slowed down considerably in recent months, the scant recovery in wages is far removed from the rise that prices have reached.
And, although the future prospects for inflation are favorable -in principle it will return to normal levels from 2024- the auguries for variable mortgages are not so optimistic. According to the futures markets, It is expected that the Euribor will not fall below 3% at least until 2028. However, the uncertainty is maximum, especially in such a long term.
The Euribor is still an indicator that reflects the interest rates at which the main European commercial banks lend. And, ultimately, those interests depend on the official rates set by the European Central Bank (ECB) at its meetings every six weeks. The institution chaired by Christine Lagarde announced last week that it expects another rise of 0.5 points in March, but what may happen after that date is unknown.
Meanwhile, Mortgages in the most vulnerable situations can benefit from the two codes of good practice that the Government and the banks signed at the end of last year. They include measures such as deficiencies in the payment of the principal (that is, paying only the interest payment for a period of time) together with an extension of the duration of the loan so that the surcharge on the installments after the grace period is more assumable. In any case, it should be remembered that these two measures end up causing the mortgaged person to pay more interest on their loan than if they had not taken it.